Working Paper

Co-movement in sticky price models with durable goods

Abstract: In an interesting paper Barsky, House, and Kimball (2005) demonstrate that in a standard sticky price model a monetary contraction will lead to a decline in nondurable goods production but an increase in durable goods production, so that aggregate output is little changed. This lack of co-movement between nondurables and durables is wildly at odds with the data and occurs because, by assumption, durable goods prices are relatively more flexible than nondurable goods prices. We investigate possible solutions to this puzzle: nominal wage stickiness and credit constraints. We demonstrate that by adding adjustment costs as in Topel-Rosen, the sticky wage model solves the co-movement puzzle and delivers reasonable volatilities.

Keywords: Durable goods, Consumer;

https://doi.org/10.26509/frbc-wp-200614

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2006

Number: 0614