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Labour market frictions, monetary policy and durable goods

Author

Listed:
  • Di Pace, Frederico

    (Bank of England)

  • Hertweck, Matthias

    (University of Konstanz)

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.

Suggested Citation

  • Di Pace, Frederico & Hertweck, Matthias, 2016. "Labour market frictions, monetary policy and durable goods," Bank of England working papers 623, Bank of England.
    • Handle: RePEc:boe:boeewp:0623
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    Cited by:

    1. Casalis, André & Krustev, Georgi, 2022. "Cyclical drivers of euro area consumption: What can we learn from durable goods?," Journal of International Money and Finance, Elsevier, vol. 120(C).
    2. Federico Di Pace & Christoph Görtz, 2021. "Monetary Policy, Sectoral Comovement and the Credit Channel," CESifo Working Paper Series 9142, CESifo.
    3. Naraidoo, Ruthira & Paez-Farrell, Juan, 2023. "Commodity price shocks, labour market dynamics and monetary policy in small open economies," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).
    4. Cantelmo, Alessandro & Melina, Giovanni, 2018. "Monetary policy and the relative price of durable goods," Journal of Economic Dynamics and Control, Elsevier, vol. 86(C), pages 1-48.
    5. Micheli, Martin, 2015. "Does height affect labor supply? Implications of product variety and caloric needs," Ruhr Economic Papers 566, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    6. Siena, Daniele & Zago, Riccardo, 2022. "Employment protection legislation matters for the Phillips Curve," Economics Letters, Elsevier, vol. 220(C).
    7. Di Pace, Federico & Görtz, Christoph, 2021. "Sectoral comovement, monetary policy and the credit channel," Bank of England working papers 925, Bank of England.

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    More about this item

    Keywords

    Durable production; labour market frictions; sectoral comovement; monetary policy;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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