Comovement: It's Not a Puzzle
FRB of St. Louis Working Paper No. 2005-035A
40 Pages Posted: 17 Jun 2005
Date Written: April 2005
A defining feature of business cycles is the comovement of inputs at the sectoral level with aggregate activity. Standard models cannot account for this phenomenon. This paper develops and estimates a two-sector dynamic general equilibrium model which can account for this key regularity. My model incorporates three shocks to the economy: monetary policy shocks, neutral technology shocks, and embodied technology shocks in the capital producing sector. The estimated model is able to account for the response of the US economy to all three shocks. Using this model, I argue that the key friction underlying sectoral comovement is rigidity in nominal wages.
Keywords: Comovement, business cycles, sticky wage
JEL Classification: E20, E32, O41, O42
Suggested Citation: Suggested Citation