EconPapers    
Economics at your fingertips  
 

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 (2) Track citations by RSS feed

Downloads: (external link)
https://www.minneapolisfed.org/research/sr/sr622.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
Working Paper: Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy (2019) Downloads
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:fip:fedmsr:89902

DOI: 10.21034/sr.622

Access Statistics for this paper

More papers in Staff Report from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Jannelle Ruswick ( this e-mail address is bad, please contact ).

 
Page updated 2022-09-29
Handle: RePEc:fip:fedmsr:89902