Working Paper: CEPR ID: DP5916
Authors: Tommaso Monacelli
Abstract: Econometric evidence suggests that, in response to monetary policy shocks, durable and non-durable spending comove positively, and durable spending exhibits a much larger sensitivity to the policy shocks. A standard two-sector New Keynesian model with free borrowing persistently exhibits a co-movement problem: if spending contracts in one sector, it expands in the other. We argue that, even when durable prices are flexible, the introduction of a collateral constraint on borrowing and the consideration of durables as collateral assets generate both a correct sectoral co-movement and a procyclical response of durable consumption to policy shocks. In this vein, collateral constraints act as a substitute of nominal rigidity in durable prices. However, since in the model nominal non-indexed debt and the collateral constraint generate alternative channels for monetary non-neutrality, our framework leaves room for relaxing the assumption of price stickiness also for nondurable goods prices, in line with some recent micro-based evidence. In a limit case of fully flexible prices in both sectors, a policy shock still generates a sizeable degree of monetary non-neutrality, as well as the correct sectoral co-movement. In this vein, collateral constraints act as a substitute of price stickiness altogether.
Keywords: collateral constraint; durable goods; sticky prices
JEL Codes: E52; E62; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy shocks (E39) | Durable spending (H56) |
| Monetary policy shocks (E39) | Nondurable spending (H61) |
| Monetary policy tightening (E52) | Real debt (H63) |
| Monetary policy tightening (E52) | Durable consumption (E21) |
| Collateral constraints (D10) | Durable consumption (E21) |
| Nominal debt + Collateral constraints (H63) | Durable consumption (E21) |
| Monetary policy variations (E49) | Nominal debt effect (H63) |
| Monetary policy variations (E49) | Collateral constraint effect (D10) |
| Monetary policy variations (E49) | Valuation effect (D46) |