The Working Capital Channel and Cross-Sector Comovement

Abstract

This paper studies crossRsector comovement, one of the defining characteristics of the business cycle, in a monetary framework. We argue that monetary factors might be important for understanding this phenomenon through a working capital channel. We show that in a sticky portfolio adjustment model where firms borrow to finance working capital, a positive money supply shock drives the nominal interest rate down, thereby stimulating finns1 borrowing and causing employment to rise in different sectors. A positive aggregate technology shock can also drive the nominal interest rate down upon impact and induce comovement when the elasticity of labor supply is large. (E32, E40)