BoE paper tackles ‘sectoral co-movement puzzle’
Adding labour market frictions and habit formation helps solve problem
A staff working paper published on October 10 by the Bank of England seeks to improve monetary models to overcome the so-called "sectoral co-movement puzzle".
Federico Di Pace and Matthias Hertweck note that in a standard model with durable and non-durable goods, a monetary contraction triggers a sharp fall in the price of the former, encouraging people to transfer consumption away from non-durable items.
The opposing effects on sectoral outputs almost offset one another, making monetary shocks
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