Output Comovement and Inflation Dynamics in a Two‐Sector Model with Durable Goods: The Role of Sticky Information and Heterogeneous Factor Markets

Abstract

AbstractIn the United States, the inflation and output of durable and nondurable goods respond to a monetary policy shock in the same direction with a delay. However, the existing New Keynesian dynamic stochastic general equilibrium models that generate the positive output comovement cannot explain this delayed response in sectoral inflation. We show that adding sticky information to both goods along with heterogeneous factors of production can explain the observed patterns in sectoral inflation and output. Moreover, in line with recent empirical findings, the estimated information stickiness is larger for housing than for nondurable goods and services.