Sticky Price Models, Durable Goods, and Real Wage Rigidities

The standard two-sector New Keynesian model with durable goods is at odds with conventional wisdom and VAR evidence: Following a monetary shock, it generates (i) either negative or no comovement across sectoral outputs, and (ii) aggregate neutrality of money when durable-goods' prices are flexible. We reconcile theory with evidence by incorporating real wage rigidities into the standard model: As long as durable-goods' prices are more flexible than nondurable-goods' prices, we obtain positive sectoral comovement and, thus, aggregate non-neutrality of money.