Macroeconomic Effects of Inflationary Shocks with Durable and Non-Durable Consumption

Sushanta Mallick () and Mohammed Mohsin ()
Additional contact information
Mohammed Mohsin: University of Tennessee

Open Economies Review, 2016, vol. 27, issue 5, No 5, 895-921

Abstract: Abstract In this paper we show that inflation, both in the short and long run, negatively affects durable and non-durable consumption and output, and positively influences the current account balance. In particular, the impact of inflation is more pronounced on durable relative to non-durable goods. Using quarterly data from Canada, the UK and the USA, we demonstrate that these findings are consistent and robust across different econometric specifications. An open economy model with durable and non-durable consumption, households with labor/leisure choice and money introduced through cash-in-advance (CIA) constraint on consumption expenditure alone could meaningfully explain these empirical observations. Our empirical findings of non-neutral and negative effects of inflation on real growth are significant for many economic models in the asset pricing literature that support a negative co-movement of stock prices and expected inflation. Moreover, such positive inflation premium in our model could provide economic explanation for a positive slope of the nominal term structure in the data.

Keywords: Durable goods; Current account; Sign VAR; Impulse responses; E52; E58; F32; F41 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

Downloads: (external link)
http://link.springer.com/10.1007/s11079-016-9405-0 Abstract (text/html)
Access to full text is restricted to subscribers.

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:kap:openec:v:27:y:2016:i:5:d:10.1007_s11079-016-9405-0

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/11079/PS2

DOI: 10.1007/s11079-016-9405-0

Access Statistics for this article

Open Economies Review is currently edited by G.S. Tavlas

More articles in Open Economies Review from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().