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Consumer Spending and the After-Tax Real Interest Rate

In: Taxes and Capital Formation

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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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Suggested Citation

  • N. Gregory Mankiw, 1987. "Consumer Spending and the After-Tax Real Interest Rate," NBER Chapters, in: Taxes and Capital Formation, pages 97-100, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:7695
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    Cited by:

    1. Lukáš Kučera, 2017. "Real Interest Rate Channel from the Point of View of Chosen Theories of Investment [Kanál reálné úrokové míry z pohledu vybraných teorií investic]," Acta Oeconomica Pragensia, Prague University of Economics and Business, vol. 2017(2), pages 70-84.
    2. Erik Canton & Ed Westerhout, 1999. "A model for the Dutch pharmaceutical market," Health Economics, John Wiley & Sons, Ltd., vol. 8(5), pages 391-402, August.
    3. Fuad Hasanov, 2005. "Housing, Household Portfolio, and Intertemporal Elasticity of Substitution: Evidence from the Consumer Expenditure Survey," Macroeconomics 0510011, University Library of Munich, Germany.
    4. Feldstein, Martin, 1995. "Fiscal policies, capital formation, and capitalism," European Economic Review, Elsevier, vol. 39(3-4), pages 399-420, April.
    5. Pindyck, Robert S., 1993. "Investments of uncertain cost," Journal of Financial Economics, Elsevier, vol. 34(1), pages 53-76, August.
    6. Douglas Dacy & Fuad Hasanov, 2005. "The Rate of Interest or the Rate of Return: Estimating Intertemporal Elasticity of Substitution," Macroeconomics 0510012, University Library of Munich, Germany.
    7. Martin S. Feldstein, 1999. "Capital Income Taxes and the Benefit of Price Stability," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 9-46, National Bureau of Economic Research, Inc.
    8. Christian C. Starck, 1991. "The interest rate elasticity of aggregate consumption : a time varying parameter approach," Finnish Economic Papers, Finnish Economic Association, vol. 4(2), pages 142-153, Autumn.
    9. Douglas W. Elmendorf, "undated". "The Effect of Interest-Rate Changes on Household Saving and Consumption: A Survey," Finance and Economics Discussion Series 1996-27, Board of Governors of the Federal Reserve System (U.S.), revised 10 Dec 2019.
    10. Starck, Christian, 1990. "The Interest rate elasticity of aggregate consumption: a time varying parameter approach," Bank of Finland Research Discussion Papers 28/1990, Bank of Finland.
    11. Stéphane Auray, 2009. "Consommation, effet de substitution intertemporelle et formation des habitudes," L'Actualité Economique, Société Canadienne de Science Economique, vol. 85(4), pages 437-473.

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