Capital, Credit Constraints and the Comovement between Consumer Durables and Nondurables

Been-Lon Chen and Shian-Yu Liao

No 13-A011, IEAS Working Paper : academic research from Institute of Economics, Academia Sinica, Taipei, Taiwan

Abstract: Evidence indicates that consumer durables are more flexibly priced than nondurable goods and services. In otherwise standard two-sector neoclassical sticky-price models with flexible durable prices, following monetary tightening, nondurables decrease but consumer durables increase. Friction in lending between households can resolve the comovement problem if durable prices are sticky. However, if durable prices are flexible, friction in lending fails to generate joint decline. This paper resolves the co-movement problem by adding capital into a model with flexible durable prices and friction in lending. When capital is needed in production, monetary tightening reduces the relative price of durables which induces investment and decreases firms’ real profits in the short run. Due to fewer profits remitted from firms, savers have a lower disposable income and cannot increase expenditures on consumer durables as much as otherwise. As a consequence, aggregate consumer durables decrease and there is a joint decline of nondurables and consumer durables.

Keywords: Credit constraints; capital; consumer durables; nondurables; sticky price; comovement (search for similar items in EconPapers)
JEL-codes: E21 E52 G10 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2013-10
New Economics Papers: this item is included in nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Capital, credit constraints and the comovement between consumer durables and nondurables (2014)
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