Credit frictions and the comovement between durable and non-durable consumption

According to Monacelli (2009), a standard New-Keynesian model augmented with credit frictions solves the outstanding challenge to generate a joint decline of durable and non-durable consumption during a monetary tightening. This paper shows that his success in generating positive comovement between durables and non-durables is solely due to assumptions about price-stickiness in the durable goods sector and that the introduction of credit frictions actually makes the comovement problem harder to solve.

JEL classiffication: E44, E52

Keywords: New-Keynesian models, financial frictions, general equilibrium