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Consumer Spending and the After-Tax Real Interest Rate

In: Taxes and Capital Formation

  • N. Gregory Mankiw

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.

(This abstract was borrowed from another version of this item.)

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This chapter was published in:
  • Martin Feldstein, 1987. "Taxes and Capital Formation," NBER Books, National Bureau of Economic Research, Inc, number feld87-2, December.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 7695.
    Handle: RePEc:nbr:nberch:7695
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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