Forward Guidance and Durable Goods Demand
- (pp. 106-22)
AbstractWe study the monetary transmission mechanism in a quantitative fixed-cost model of durable goods demand. We show that aggregate demand is substantially more sensitive to contemporaneous interest rates than to forward guidance about future interest rates. Reducing the real interest rate one year from now increases output by only 41 percent as much as reducing the real interest rate today. The power of forward guidance declines further at longer horizons. We show analytically and quantitatively that this result is driven by the sensitivity of the extensive margin of durable adjustment to the contemporaneous user cost.
CitationMcKay, Alisdair, and Johannes F. Wieland. 2022. "Forward Guidance and Durable Goods Demand." American Economic Review: Insights, 4 (1): 106-22. DOI: 10.1257/aeri.20200804
- D52 Incomplete Markets
- E21 Macroeconomics: Consumption; Saving; Wealth
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy