The delayed effects of monetary shocks in a two-sector New Keynesian model

Abstract

This paper studies a two-sector New Keynesian model that captures the hump-shaped response of non-durable and durable spending to a monetary shock when non-durable prices are sticky and durable goods are flexibly priced. Based on the estimated parameters, we show that habit formation and investment adjustment costs are not sufficient to generate the gradual response of non-durable and durable spending in this setup. We find that nominal wage rigidity and non-separable preferences between consumption and labor are also necessary to delay the peak response of non-durable and durable spending in the estimated two-sector New Keynesian model.