This paper introduces two modifications to the standard real-business-cycle model: habit preferences and a two-sector technology with limited intersectoral factor mobility. The model is consistent with observed mean risk-free rate, equity premium, and Sharpe ratio on equity. It improves upon the standard model by explaining persistence in output, comovement of employment across sectors, the "excess sensitivity" of consumption growth to output growth, and the "inverted leading-indicator property" of interest rates, which are negatively correlated with future output. The paper argues that business-cycle models should consider asset pricing implications, as they are often ignored. Recent finance literature suggests that habit persistence in preferences can reconcile consumption and asset-return facts. The authors introduce habit preferences and factor-market inflexibilities to construct a business-cycle model that is consistent with key asset-return facts and business-cycle facts. The model incorporates a two-sector production technology with time lags in adjusting factors of production, reflecting empirical evidence that factors are difficult to adjust quickly in response to shocks. The model's asset-pricing implications are consistent with key features of asset returns. It performs as well as the standard RBC model in conventional measures of business-cycle volatility and comovement with output. It significantly outperforms the standard model on four other dimensions: it improves the ability to account for observed persistence in output growth, explains the movement of employment across sectors, accounts for the excess sensitivity puzzle, and explains the inverted leading-indicator property of interest rates. The model's parameterization includes habit persistence and factor-market inflexibilities. The model's ability to generate a high value for the equity premium and Sharpe ratio is attributed to these features. The model's ability to account for the inverted leading-indicator phenomenon reflects factor-market inflexibilities, not habit persistence. The paper compares the model to alternative one-sector models and concludes that the two-sector model performs better in accounting for asset-market facts and business-cycle facts. The model's ability to account for the inverted leading-indicator phenomenon is attributed to factor-market inflexibilities, not habit persistence.This paper introduces two modifications to the standard real-business-cycle model: habit preferences and a two-sector technology with limited intersectoral factor mobility. The model is consistent with observed mean risk-free rate, equity premium, and Sharpe ratio on equity. It improves upon the standard model by explaining persistence in output, comovement of employment across sectors, the "excess sensitivity" of consumption growth to output growth, and the "inverted leading-indicator property" of interest rates, which are negatively correlated with future output. The paper argues that business-cycle models should consider asset pricing implications, as they are often ignored. Recent finance literature suggests that habit persistence in preferences can reconcile consumption and asset-return facts. The authors introduce habit preferences and factor-market inflexibilities to construct a business-cycle model that is consistent with key asset-return facts and business-cycle facts. The model incorporates a two-sector production technology with time lags in adjusting factors of production, reflecting empirical evidence that factors are difficult to adjust quickly in response to shocks. The model's asset-pricing implications are consistent with key features of asset returns. It performs as well as the standard RBC model in conventional measures of business-cycle volatility and comovement with output. It significantly outperforms the standard model on four other dimensions: it improves the ability to account for observed persistence in output growth, explains the movement of employment across sectors, accounts for the excess sensitivity puzzle, and explains the inverted leading-indicator property of interest rates. The model's parameterization includes habit persistence and factor-market inflexibilities. The model's ability to generate a high value for the equity premium and Sharpe ratio is attributed to these features. The model's ability to account for the inverted leading-indicator phenomenon reflects factor-market inflexibilities, not habit persistence. The paper compares the model to alternative one-sector models and concludes that the two-sector model performs better in accounting for asset-market facts and business-cycle facts. The model's ability to account for the inverted leading-indicator phenomenon is attributed to factor-market inflexibilities, not habit persistence.