Do Flexible Durable Goods Prices Undermine Sticky Price Models?

Robert Barsky, Christopher House () and Miles Kimball

Macroeconomics from University Library of Munich, Germany

Abstract: The “neoclassical synthesis” sticky price model exhibits strange behavior when augmented with markets for durable goods with flexible prices. While in the data the output of durable goods responds strongly and positively to a loosening of monetary policy, in dynamic general equilibrium models a monetary expansion causes the output of flexibly priced durables to contract. In an instructive special case in which the only sticky prices are those of nondurables, the negative co-movement of durable and nondurable output exactly offsets and the behavior of aggregate output in the model is very similar to that of a model with fully flexible prices. This neutrality result is special, but the perverse response of durables to monetary policy is highly robust. The reason for the co-movement problem is the combination of a naturally high intertemporal elasticity of substitution for the purchases of durables and temporarily high factor prices associated with an economic expansion.

Keywords: sticky-prices; durables; comovement; neutrality (search for similar items in EconPapers)
JEL-codes: E31 E32 E40 E50 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2003-02-05
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pke
Note: Type of Document - Acrobat PDF; prepared on IBM PC ; to print on HP; pages: 42 ; figures: included
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (51)

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Related works:
Working Paper: Do Flexible Durable Goods Prices Undermine Sticky Price Models? (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0302003

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