Comovement: It's Not a Puzzle

FRB of St. Louis Working Paper No. 2005-035A

40 Pages Posted: 17 Jun 2005

See all articles by Riccardo DiCecio

Riccardo DiCecio

Federal Reserve Bank of St. Louis - Research Division

Date Written: April 2005

Abstract

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

DiCecio, Riccardo, Comovement: It's Not a Puzzle (April 2005). FRB of St. Louis Working Paper No. 2005-035A. Available at SSRN: https://ssrn.com/abstract=744798 or http://dx.doi.org/10.2139/ssrn.744798

Riccardo DiCecio (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

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