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Labour market frictions, monetary policy and durable goods

Federico Di Pace and Matthias Hertweck ()

No 623, Bank of England working papers from Bank of England

Abstract: This paper provides a quantitative answer to the ‘sectoral comovement puzzle’. We extend the two-sector New Keynesian model with flexible durable good prices and sticky non-durable good prices by (i) labour 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 given shock 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.

Keywords: Durable production; labour market frictions; sectoral comovement; monetary policy (search for similar items in EconPapers)
JEL-codes: E21 E23 E31 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2016-10-10
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Related works:
Journal Article: Labor Market Frictions, Monetary Policy, and Durable Goods (2019) Downloads
Working Paper: Labour Market Frictions, Monetary Policy and Durable Goods (2012) Downloads
Working Paper: Labour Market Frictions, Monetary Policy and Durable Goods (2012) Downloads
Working Paper: Labour Market Frictions, Monetary Policy, and Durable Goods (2012) Downloads
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