Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy

Alisdair McKay and Johannes Wieland

No 26175, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In a fixed-cost model of durable consumption demand, we show that an important channel of monetary policy transmission is to prompt households to accelerate the timing of their adjustments. We highlight three ways in which the power of monetary policy is reduced relative to the standard New Keynesian model. First, there is an intertemporal trade-off in aggregate demand as encouraging households to adjust today leaves fewer households acquiring durables going forward. Second, households make a short-term decision—adjusting now rather than in the near future—so the short-term real interest rate is the opportunity cost of adjusting today. As a result, forward guidance is less effective at shifting aggregate demand than contemporaneous interest rate cuts. Third, monetary policy becomes less powerful in a recession. The literature has debated whether fixed-cost models generate state dependence in general equilibrium; we show that if one conditions on the magnitude of the recession, the model's state dependence is unaffected by general equilibrium attenuation.

JEL-codes: E21 E43 E52 (search for similar items in EconPapers)
Date: 2019-08
New Economics Papers: this item is included in nep-mac and nep-mon
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Published as Alisdair McKay & Johannes F. Wieland, 2021. "Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy," Econometrica, Econometric Society, vol. 89(6), pages 2717-2749, November.

Downloads: (external link)
http://www.nber.org/papers/w26175.pdf (application/pdf)

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 (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:26175

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w26175

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().