Nominal Rigidities, Monetary Policy and Pigou Cycles


  • We are grateful to David Fuller, the editor, Wouter den Haan and two referees for insightful comments that lead to a substantial revision of the manuscript. This article also received valuables comments from the participants at various seminars and conferences.


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.