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Financial Frictions, Durable Goods and Monetary Policy

Author

Listed:
  • Leo Michelis

    (Department of Economics, Ryerson University, Toronto, Canada)

  • Ugochi T. Emenogu

    (Bank of Canada, Ottawa, Canada)

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.

Suggested Citation

  • Leo Michelis & Ugochi T. Emenogu, 2019. "Financial Frictions, Durable Goods and Monetary Policy," Working Papers 075, Ryerson University, Department of Economics.
    • Handle: RePEc:rye:wpaper:wp075
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    File URL: https://www.arts.ryerson.ca/economics/repec/pdfs/wp075.pdf
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    More about this item

    Keywords

    Durable goods; Sticky prices; Financial frictions; Monetary policy;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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