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Financial Frictions, Durable Goods and Monetary Policy

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

No 75, Working Papers from Ryerson 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
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