Comovement: it's not a puzzle

Riccardo DiCecio

No 2005-035, Working Papers from Federal Reserve Bank of St. Louis

Abstract: A defining feature of business cycles is the comovement of inputs at the sectoral level with aggregate activity. Standard models cannot account for this phenomenon. This paper develops and estimates a two-sector dynamic general equilibrium model that can account for this key regularity. My model incorporates three shocks to the economy: monetary policy shocks, neutral technology shocks, and embodied technology shocks in the capital-producing sector. The estimated model is able to account for the response of the US economy to all three shocks. Using this model, I argue that the key friction underlying sectoral comovement is rigidity in nominal wages.

Keywords: Business cycles; Wages (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (23)

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Working Paper: Comovement: it's not a puzzle (2008)
Working Paper: Comovement: it's not a puzzle (2004)
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