Abstract
This paper aims to investigate the macroeconomic effects of monetary policy in a new Keynesian model with home production. This paper shows that, because of home production, households can maintain their utility by spending more time in home production and consuming more home goods when a contractionary monetary policy shock happens. The presence of the intratemporal adjustment costs of turning home investment into business investment (or the other way around) can help the model account for the comovement between business and home investments. To solve the comovement puzzle in the traditional new Keynesian model raised by Barsky et al. (2003, 2007), i.e. the comovement between nondurable and durable goods, we assume that the prices of durable goods are equally or more rigid as compared to the prices of nondurable goods. Our numerical results suggest that introducing home production into the model is not only realistic but also helpful for solving the comovement puzzle.