Nominal Rigidities, Monetary Policy and Pigou Cycles

Capturing the boom phase of Pigou cycles and resolving the comovement problem require positive sectoral comovement. This article addresses these observations using a two-sector New Keynesian model. Price rigidities dampen movements in the relative price of durables following a monetary policy shock. Durables and non-durables are estimated to be complements in utility, allowing for a resolution of the comovement problem for modest degrees of price rigidity. Nominal rigidities also make firms forward-looking in their pricing behaviour, which leads to relative price dynamics that generate positive sectoral comovement in the boom phase of a Pigou cycle.