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Capital, credit constraints and the comovement between consumer durables and nondurables

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  • Chen, Been-Lon
  • Liao, Shian-Yu

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.

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  • Chen, Been-Lon & Liao, Shian-Yu, 2014. "Capital, credit constraints and the comovement between consumer durables and nondurables," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 127-139.
    • Handle: RePEc:eee:dyncon:v:39:y:2014:i:c:p:127-139
    DOI: 10.1016/j.jedc.2013.11.005
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    Cited by:

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    2. Xinkuo Xu & Liyan Han, 2017. "Diverse Effects of Consumer Credit on Household Carbon Emissions at Quantiles: Evidence from Urban China," Sustainability, MDPI, vol. 9(9), pages 1-25, September.
    3. Cooper Howes, 2019. "Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment," 2019 Meeting Papers 1581, Society for Economic Dynamics.
    4. Cantelmo, Alessandro & Melina, Giovanni, 2018. "Monetary policy and the relative price of durable goods," Journal of Economic Dynamics and Control, Elsevier, vol. 86(C), pages 1-48.
    5. Tomiyuki Kitamura & Tamon Takamura, 2022. "Output Comovement and Inflation Dynamics in a Two‐Sector Model with Durable Goods: The Role of Sticky Information and Heterogeneous Factor Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(1), pages 313-331, February.
    6. Leo Michelis & Ugochi T. Emenogu, 2019. "Financial Frictions, Durable Goods and Monetary Policy," Working Papers 075, Ryerson University, Department of Economics.
    7. Been‐Lon Chen & Shian‐Yu Liao, 2018. "Durable Goods, Investment Shocks, and the Comovement Problem," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(2-3), pages 377-406, March.
    8. Sayed Mehdi Naji Esfahani, 2015. "Co-movement Puzzle and the Overlapping Roles of Consumer Durables and Capital," EcoMod2015 8681, EcoMod.
    9. Liao, Shian-Yu & Chen, Been-Lon, 2023. "News shocks to investment-specific technology in business cycles," European Economic Review, Elsevier, vol. 152(C).
    10. Hilary Patroba, 2018. "Credit frictions and co-movement of durable and non-durable goods in a small open economy," Working Papers 730, Economic Research Southern Africa.
    11. Ugochi Emenogu & Leo Michelis, 2019. "Financial Frictions, Durable Goods and Monetary Policy," Staff Working Papers 19-31, Bank of Canada.

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    More about this item

    Keywords

    Credit constraints; Capital; Consumer durables; Nondurables; Sticky price; Comovement;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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