The paper introduces two modifications to the standard real-business-cycle (RBC) model: habit preferences and a two-sector technology with limited intersectoral factor mobility. These modifications aim to address the "equity premium puzzle" and the "risk-free rate puzzle" in asset pricing, which have been challenging for traditional RBC models. The model is consistent with observed asset returns and business cycle dynamics, including output persistence, sectoral comovement of employment, the "excess sensitivity" of consumption growth to output growth, and the "inverted leading-indicator property" of interest rates. The authors construct the model by incorporating habit persistence in consumption preferences and factor-market inflexibilities, which reduce the elasticity of capital supply. They find that the model significantly outperforms the standard RBC model in explaining key business cycle phenomena, such as the persistence in output growth, sectoral comovement of employment, and the relationship between consumption growth and interest rates. The paper also discusses the implications of the model for asset pricing and compares it to alternative one-sector models, concluding that their approach is superior in accounting for both asset prices and business cycles.The paper introduces two modifications to the standard real-business-cycle (RBC) model: habit preferences and a two-sector technology with limited intersectoral factor mobility. These modifications aim to address the "equity premium puzzle" and the "risk-free rate puzzle" in asset pricing, which have been challenging for traditional RBC models. The model is consistent with observed asset returns and business cycle dynamics, including output persistence, sectoral comovement of employment, the "excess sensitivity" of consumption growth to output growth, and the "inverted leading-indicator property" of interest rates. The authors construct the model by incorporating habit persistence in consumption preferences and factor-market inflexibilities, which reduce the elasticity of capital supply. They find that the model significantly outperforms the standard RBC model in explaining key business cycle phenomena, such as the persistence in output growth, sectoral comovement of employment, and the relationship between consumption growth and interest rates. The paper also discusses the implications of the model for asset pricing and compares it to alternative one-sector models, concluding that their approach is superior in accounting for both asset prices and business cycles.