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Sticky Price Models and Durable Goods

  • Robert Barsky

    (University of Michigan)

  • Christopher L. House

    (University of Michigan)

  • Miles Kimball

    (University of Michigan)

This paper shows that there are striking implications that stem from including durable goods in otherwise conventional sticky price models. The behavior of these models depends heavily on whether durable goods are present and whether these goods have sticky prices. If long-lived durables have sticky prices, then even small durables sectors can cause the model to behave as though most prices were sticky. Conversely, if durable goods prices are flexible then the model exhibits unwelcome behavior. Flexibly priced durables contract during periods of economic expansion. The tendency towards negative comovement is very robust and can be so strong as to dominate the aggregate behavior of the model. In an instructive limiting case, money has no effects on aggregate output even though most prices in the model are sticky.

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File URL: http://econwpa.repec.org/eps/mac/papers/0501/0501031.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0501031.

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Length: 41 pages
Date of creation: 27 Jan 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0501031
Note: Type of Document - pdf; pages: 41
Contact details of provider: Web page: http://econwpa.repec.org

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