Co-movement Puzzle and the Overlapping Roles of Consumer Durables and Capital

This paper resolves the co-movement puzzle in durable goods by revising one of the traditional assumptions in the standard theory, that is functional distinguishability of consumer durables and capital. This paper also shows how the standard assumption of distinguishable roles of consumer durables and capital is the major responsible for the failure of standard theory to generate counterfactual responses for durable spending. - VAR - New-Keynesian dynamic stochastic general equilibrium- The assumption of overlapping roles of consumer durables and capital not only can resolve the co-movement puzzle but also tempers the extraordinary sensitivity of durable spendings in response to monetary policy shocks.