TY - JOUR AU - Barsky,Robert AU - House,Christopher L. AU - Kimball,Miles TI - Do Flexible Durable Goods Prices Undermine Sticky Price Models? JF - National Bureau of Economic Research Working Paper Series VL - No. 9832 PY - 2003 Y2 - July 2003 UR - http://www.nber.org/papers/w9832 L1 - http://www.nber.org/papers/w9832.pdf N1 - Author contact info: Robert B. Barsky Department of Economics University of Michigan Ann Arbor, MI 48109-1220 Tel: 734/764-9476 Fax: 734/764-2769 E-Mail: barsky@umich.edu Christopher House University of Michigan Department of Economics 238 Lorch Hall Ann Arbor, MI 48109-1220 Tel: 734/764-2364 Fax: 734/764-2769 E-Mail: chouse@umich.edu Miles S. Kimball Department of Economics University of Michigan Ann Arbor, MI 48109-1220 Tel: 734/764-2375 Fax: 734/764-2769 E-Mail: mkimball@umich.edu AB - Multi-sector sticky price models have surprising implications when durable goods have flexible prices. While in actual data the production of virtually all durables exhibits strong negative responses to monetary contractions, in dynamic general equilibrium models a monetary contraction causes the output of flexibly priced durables to expand. Indeed, in the polar case in which only nondurables have sticky prices, the negative comovement of durable and nondurable production exactly offsets and the behavior of aggregate output mimics that of a model with fully flexible prices. While this neutrality' result is special, the comovement problem' -- the perverse response of flexibly priced durables to monetary policy shocks -- is highly robust. When some durables prices are flexible and others sticky, the comovement problem still applies strongly to the subset of durables with flexible prices. We argue that new housing construction might be best characterized as a flexible price industry for which the comovement problem is relevant. The underlying reason for the comovement problem is the combination of a naturally high intertemporal elasticity of substitution for the purchases of durables and temporarily low marginal costs associated with economic contractions. ER -