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NOMINAL RIGIDITIES, RESIDENTIAL INVESTMENT, AND ADJUSTMENT COSTS

Published online by Cambridge University Press:  15 December 2009

Charles T. Carlstrom  and
Timothy S. Fuerst
Charles T. Carlstrom
Affiliation:
Federal Reserve Bank of Cleveland
Timothy S. Fuerst*
Affiliation:
Bowling Green State University and Federal Reserve Bank of Cleveland
*
Address correspondence to: Timothy S. Fuerst, Department of Economics, Bowling Green State University, Bowling Green, OH 43403, USA; e-mail: tfuerst@bgsu.edu.
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Abstract

Evidence suggests that durable goods and residential housing are more flexibly priced than nondurables and services. Using a standard sticky price general equilibrium model, Barsky, House, and Kimball [American Economic Review 97(3) (2007), 984–998] demonstrate that if durable goods are flexibly priced and nondurables are sticky, then a monetary contraction leads to an expansion in production in the durable sector. This is wildly at odds with the empirical evidence. This paper demonstrates that if three features are added to the model (sticky nominal wages, housing construction adjustment costs, and habit persistence in consumption), it delivers sectoral implications that are broadly consistent with the data.

Keywords

Residential investmentSticky pricesAdjustment costs
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Issue 1 , February 2010 , pp. 136 - 148
Copyright
Copyright © Cambridge University Press 2009

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References

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