The standard two-sector monetary business cycle model suffers from an important deficiency. Since durable good prices are more flexible than non-durable good prices, optimising households build up the stock of durable goods at low cost after a monetary contraction. Consequently, sectoral outputs...

This paper provides a quantitative answer to the ‘sectoral comovement puzzle'. We extend the two-sector New Keynesian model with flexible durable good prices and sticky non-durable good prices by:(i) labour search and matching frictions and (ii) internal habit formation in non-durable...

We build a robustness (RB) version of the Obstfeld (1994) model to study the effects of financial integration on growth and welfare. Our model can account for the empirically observed heterogeneity in the relationship between growth and volatility for different countries. The calibrated model...

This paper studies how "rational inattention (RI)" -- a type of information processing constraint proposed by Sims (2003) -- affects the joint dynamics of consumption and income in a permanent income model with general income processes. Specifically, I propose an analytical approach to solve the...

We analyze a dynamic moral hazard setting, in which agents can borrow and lend and their decisions about effort, consumption and savings are private information. In contrast with previous findings, we show that as long as agents do not have perfect control over publicly observable outcomes, the...