This paper examines the role that wealth effects on labour supply play in a two-sector sticky-price model that includes non-durables and housing. Careful analysis of a two-sector sticky-price model reveals that whether there are wealth effects on labour supply fundamentally changes the nature of the model in a way that has not been fully appreciated. In the presence of wealth effects on labour supply, as Barsky et al. study demonstrate, the pricing of housing is central to the behaviour of the model, whereas price rigidity in the non-durable goods sector is much less important. In the absence of these wealth effects, by contrast, the behaviour of the model depends critically on whether the non-durable goods, not the new housing, themselves have sticky prices.
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