Forward Guidance and Durable Goods Demand

Alisdair McKay and Johannes Wieland

American Economic Review: Insights, 2022, vol. 4, issue 1, 106-22

Abstract: We study the monetary transmission mechanism in a quantitative fixed-cost model of durable goods demand. We show that aggregate demand is substantially more sensitive to contemporaneous interest rates than to forward guidance about future interest rates. Reducing the real interest rate one year from now increases output by only 41 percent as much as reducing the real interest rate today. The power of forward guidance declines further at longer horizons. We show analytically and quantitatively that this result is driven by the sensitivity of the extensive margin of durable adjustment to the contemporaneous user cost.

JEL-codes: D52 E21 E43 E52 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (7)

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Working Paper: Forward Guidance and Durable Goods Demand (2020)
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DOI: 10.1257/aeri.20200804

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