Output comovement and inflation dynamics in a two-sector model with durable goods : the role of sticky information and heterogeneous factor markets / by Tomiyuki Kitamura and Tamon Takamura.: FB3-5/2016-36E-PDF

In a simple two-sector New Keynesian model, sticky prices generate a counterfactual negative comovement between the output of durable and nondurable goods following a monetary policy shock. We show that heterogeneous factor markets allow any combination of strictly positive price stickiness to generate positive output comovement. Even if the prices of durable goods are flexible, adding sticky information ensures that the output of both sectors moves in the same direction. Furthermore, we find that the combination of sticky information and heterogeneous factor markets produces hump-shaped responses in both sectoral output and inflation, as observed in a vector-autoregression analysis. In contrast to backward indexation to past inflation, which is often assumed in the literature, sticky information leads to a hump-shaped response in the inflation of flexibly priced goods. Finally, the estimated information stickiness through the minimum-distance estimation method suggests that information rigidity is stronger in residential investment than nondurable goods and services.

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Publication information
Department/Agency Bank of Canada.
Title Output comovement and inflation dynamics in a two-sector model with durable goods : the role of sticky information and heterogeneous factor markets / by Tomiyuki Kitamura and Tamon Takamura.
Series title Staff Working Paper, 1701-9397 ; 2016-36
Publication type Series - View Master Record
Language [English]
Format Electronic
Electronic document
Note(s) "July 2016."
Includes bibliographical references.
Publishing information [Ottawa] : Bank of Canada, c2016.
Author / Contributor Kitamura, Tomiyuki.
Takamura, Tamon.
Description iv, 34 p.
Catalogue number
  • FB3-5/2016-36E-PDF
Subject terms Inflation
Prices
Monetary policy
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