Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy

Alisdair McKay and Johannes Wieland

No 622, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: The prevailing neo-Wicksellian view holds that the central bank's objective is to track the natural rate of interest (r*), which itself is largely exogenous to monetary policy. We challenge this view using a fixed-cost model of durable consumption demand, in which expansionary monetary policy prompts households to accelerate purchases of durable goods. This yields an intertemporal trade-off in aggregate demand as encouraging households to increase durable holdings today leaves fewer households acquiring durables going forward. Interest rates must be kept low to support demand going forward, so accommodative monetary policy today reduces r* in the future. We show that this mechanism is quantitatively important in explaining the persistently low level of real interest rates and r* after the Great Recession.

Keywords: Monetary policy; Durable goods; Interest rates (search for similar items in EconPapers)
JEL-codes: E21 E43 E52 (search for similar items in EconPapers)
Pages: 72
Date: 2021-02-16
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy (2021)
Working Paper: Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:89902

DOI: 10.21034/sr.622

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