Working Paper: NBER ID: w1991
Authors: N. Gregory Mankiw
Abstract: This paper examines the interaction between consumer durable goods and \nconsumer non-durable goods in determining the responsiveness of total \nexpenditure to the after-tax real interest rate. The introduction of \nconsumer durables into the consumer's decision problem can have important \neffects on the interest elasticity of total spending. The channel \nhighlighted here might be called the "user cost effect," in that the \nafter-tax interest rate enters the implicit user cost of consumer durable \ngoods. Even if a consumer has a one-period planning horizon, possibly \nbecause of a binding borrowing constraint, the user cost effect may \nnonetheless make his spending highly interest sensitive. Finally, the \npaper examines the response of the level and composition of consumer \nspending to the high real interest rates experienced in the early 1980s.
Keywords: Consumer Spending; Real Interest Rate; Durables; Nondurables
JEL Codes: E21; E43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aftertax real interest rate (E43) | consumer spending on durables (E20) |
| aftertax real interest rate (E43) | consumer spending on nondurables (D12) |
| aftertax real interest rate (E43) | interest elasticity of total spending (D12) |
| consumer durables (L68) | interest elasticity of total spending (D12) |
| aftertax real interest rate (E43) | spending forecast error for durables (H68) |