Financial Frictions, Durable Goods and Monetary Policy

Leo Michelis () and Ugochi Emenogu ()
Additional contact information
Leo Michelis: Department of Economics, Ryerson University, Toronto, Canada
Ugochi Emenogu: Bank of Canada, Ottawa, Canada

No 75, Working Papers from Toronto Metropolitan University, Department of Economics

Abstract: This paper examines the effect of financial frictions on the consumption of durables and non-durables in a two-sector DSGE model with sticky prices and heterogeneous agents. The financial frictions are a combination of loan-to-value (LTV) and payment-to-income (PTI) constraints faced by borrowers. In this setting a monetary contraction reduces drastically the maximum amount that consumers can borrow in order to purchase durable goods. As a result, the model predicts that the consumption of durables falls, along with non-durables even when durable prices are fully flexible. Also output falls and the nominal interest rate increases following a monetary tightening. Thus, the model matches better the predictions of the model with the data, relative to the existing literature.

Keywords: Durable goods; Sticky prices; Financial frictions; Monetary policy (search for similar items in EconPapers)
JEL-codes: E44 E52 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2019-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.arts.ryerson.ca/economics/repec/pdfs/wp075.pdf (application/pdf)

Related works:
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:rye:wpaper:wp075

Access Statistics for this paper

More papers in Working Papers from Toronto Metropolitan University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Doosoo Kim ().