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Consumer Durables And The Interest Rate

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Author Info
KISEOK HONG
Abstract

This paper investigates the relationship between consumption of a durable good and the interest rate. According to the standard Permanent Income Hypothesis (PIH), a rise in the interest rate is expected to decrease durables consumption, and the magnitude of the interest rate effect should meet certain restrictions. This implication of the PIH is tested using US data. Empirical results of this paper indicate that, although durables consumption is negatively correlated with the interest rate, the magnitude of the estimated effect is substantially smaller than requested by the standard theory. This suggests that the influence of monetary policy on durables expenditure may not be as large as previous authors claim. In attempts to explain the small effects of the interest rate, frictions such as adjustment costs and liquidity constraints are examined. [E21]

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Article provided by Korean International Economic Association in its journal International Economic Journal.

Volume (Year): 17 (2003)
Issue (Month): 2 (June)
Pages: 105-127
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Handle: RePEc:taf:intecj:v:17:y:2003:i:2:p:105-127

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  1. Ogaki, M & Reinhart, C-M, 1995. "Measuring Intertemporal Substitution : The Role of Durable Goods," RCER Working Papers 404, University of Rochester - Center for Economic Research (RCER).
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  2. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April. [Downloadable!] (restricted)
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  3. Caballero, Ricardo J, 1994. "Small Sample Bias and Adjustment Costs," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 52-58, February. [Downloadable!] (restricted)
  4. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1991. "Stochastic trends and economic fluctuations," Working Paper Series, Macroeconomic Issues 91-4, Federal Reserve Bank of Chicago.
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  5. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July. [Downloadable!] (restricted)
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  6. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, vol. 55(5), pages 1035-56, September. [Downloadable!] (restricted)
  7. N. Gregory Mankiw, 1985. "Consumer Durables and the Real Interest Rate," NBER Working Papers 1148, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Caballero, Ricardo J, 1993. "Durable Goods: An Explanation for Their Slow Adjustment," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 351-84, April. [Downloadable!] (restricted)
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  9. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425. [Downloadable!] (restricted)
  10. Topel, Robert H & Rosen, Sherwin, 1988. "Housing Investment in the United States," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 718-40, August. [Downloadable!] (restricted)
  11. Eberly, Janice C, 1994. "Adjustment of Consumers' Durables Stocks: Evidence from Automobile Purchases," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 403-36, June. [Downloadable!] (restricted)
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  12. Caballero, Ricardo J, 1990. "Expenditure on Durable Goods: A Case for Slow Adjustment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 727-43, August. [Downloadable!] (restricted)
  13. Grossman, Sanford J & Laroque, Guy, 1990. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Econometrica, Econometric Society, vol. 58(1), pages 25-51, January. [Downloadable!] (restricted)
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