Labor Market Frictions, Monetary Policy, and Durable Goods

Federico Di Pace and Matthias Hertweck

Review of Economic Dynamics, 2019, vol. 32, 274-304

Abstract: This paper argues that the labor market is key to understanding the "sectoral comovement puzzle". We extend the two-sector New Keynesian model with flexible durable good prices and sticky non-durable good prices by introducing (i) labor search and matching frictions and (ii) internal habit formation in non-durable consumption. Search and matching frictions generate comovement and increase the persistence of sectoral outputs, whereas habit formation helps to appropriately distribute the impact of a monetary contraction over the two sectors. As a result, our estimated model closely replicates the amplitude and the curvature of the empirical impulse responses in both sectors. (Copyright: Elsevier)

Keywords: Durable production; Labor market frictions; Sectoral comovement; Monetary policy (search for similar items in EconPapers)
JEL-codes: E21 E23 E31 E52 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Software Item: Code and data files for "Labor Market Frictions, Monetary Policy, and Durable Goods" (2018)
Working Paper: Labour market frictions, monetary policy and durable goods (2016)
Working Paper: Labour Market Frictions, Monetary Policy and Durable Goods (2012)
Working Paper: Labour Market Frictions, Monetary Policy and Durable Goods (2012)
Working Paper: Labour Market Frictions, Monetary Policy, and Durable Goods (2012)
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DOI: 10.1016/j.red.2018.10.003

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