Co-Movement in Sticky Price Models with Durable Goods

35 Pages Posted: 19 Oct 2007

See all articles by Charles T. Carlstrom

Charles T. Carlstrom

Federal Reserve Bank of Cleveland

Timothy S. Fuerst

University of Notre Dame

Date Written: November 2006

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: monetary transmission, durable goods, sticky prices, co-movement puzzle

JEL Classification: E31, E52

Suggested Citation

Carlstrom, Charles T. and Fuerst, Timothy S., Co-Movement in Sticky Price Models with Durable Goods (November 2006). FRB of Cleveland Working Paper No. 06-14, Available at SSRN: https://ssrn.com/abstract=1022184 or http://dx.doi.org/10.2139/ssrn.1022184

Charles T. Carlstrom (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States
216-579-2294 (Phone)
216-579-3050 (Fax)

Timothy S. Fuerst

University of Notre Dame ( email )

Notre Dame, IN 46556
United States

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