Nonhomothetic Preferences with Habit Formation in Nondurable and Durable Consumption: Implications for Sectoral Comovement

We argue that nonhomothetic preferences with habit formation in nondurable and durable consumption can be a driving force behind sectoral comovement in production. We make this point by augmenting a two-sector New Keyesian model a la Barsky, House and Kimball (2007) with these two real features of the data. Our estimates imply that these two features interact to generate an empirically important mechanism that propagates monetary shocks to produce significant cross-sector comovement