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Interest Rates and the Market for New Light Vehicles

Author

Listed:
  • George Hall

    () (Brandeis University)

  • Adam Copeland

    () (Federal Reserve Bank of New York)

  • Louis Maccini

    () (Johns Hopkins University)

Abstract

We study the impact of interest rates changes on both the demand and supply of new light vehicles in an environment where consumers and manufacturers face their own interest rates. An increase in the consumers’ interest rate raises their cost of financing and thus lowers the demand for new vehicles. An increase in the manufacturers’ interest rate raises their cost of holding inventories. Both channels have equilibrium effects that are amplified and propagated over time through inventories, which serve as a way to both smooth production and facilitate greater sales at a given price. Through the estimation of a dynamic stochastic market equilibrium model, we find evidence of both channels at work and of the important role played by inventories. A temporary 100 basis-point increase in both interest rates causes vehicle production to fall 12 percent and sales to fall 3.25 percent at an annual rate in the short run.

Suggested Citation

  • George Hall & Adam Copeland & Louis Maccini, 2015. "Interest Rates and the Market for New Light Vehicles," Working Papers 94, Brandeis University, Department of Economics and International Businesss School.
  • Handle: RePEc:brd:wpaper:94
    as

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    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP94.pdf
    File Function: First version, 2015
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    References listed on IDEAS

    as
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. 2012 deflation explained
      by Bruno Duarte in EUnomics on 2018-09-19 21:04:50

    More about this item

    Keywords

    interest rates; automobiles; inventories; Bayesian maximum likelihood;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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