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Consumer Spending and the After-Tax Real Interest Rate

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  • N. Gregory Mankiw

Abstract

This paper examines the interaction between consumer durable goods and consumer non-durable goods in determining the responsiveness of total expenditure to the after-tax real interest rate. The introduction of consumer durables into the consumer's decision problem can have important effects on the interest elasticity of total spending. The channel highlighted here might be called the "user cost effect," in that the after-tax interest rate enters the implicit user cost of consumer durable goods. Even if a consumer has a one-period planning horizon, possibly because of a binding borrowing constraint, the user cost effect may nonetheless make his spending highly interest sensitive. Finally, the paper examines the response of the level and composition of consumer spending to the high real interest rates experienced in the early 1980s.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1991.

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Date of creation: Aug 1986
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Publication status: published as Mankiw, N. Gregory."Consumer Spending and the After-Tax Real Interest Rate." The Effects of Taxation on Capital Accumulation, ed by Martin Feldstein. Chicago: UCP, 1987.
Handle: RePEc:nbr:nberwo:1991

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Cited by:
  1. Martin S. Feldstein, 1999. "Capital Income Taxes and the Benefit of Price Stability," NBER Chapters, National Bureau of Economic Research, Inc, in: The Costs and Benefits of Price Stability, pages 9-46 National Bureau of Economic Research, Inc.
  2. Feldstein, Martin, 1995. "Fiscal policies, capital formation, and capitalism," European Economic Review, Elsevier, Elsevier, vol. 39(3-4), pages 399-420, April.
  3. Douglas Dacy & Fuad Hasanov, 2005. "The Rate of Interest or the Rate of Return: Estimating Intertemporal Elasticity of Substitution," Macroeconomics, EconWPA 0510012, EconWPA.
  4. Fuad Hasanov, 2005. "Housing, Household Portfolio, and Intertemporal Elasticity of Substitution: Evidence from the Consumer Expenditure Survey," Macroeconomics, EconWPA 0510011, EconWPA.
  5. Pindyck, Robert S., 1993. "Investments of uncertain cost," Journal of Financial Economics, Elsevier, Elsevier, vol. 34(1), pages 53-76, August.
  6. Erik Canton & Ed Westerhout, 1999. "A model for the Dutch pharmaceutical market," Health Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 8(5), pages 391-402.

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