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Title: |
Consumer Durables and the Interest Rate |
| Author: |
Hong, Kiseok |
| Author
Affiliation: |
Ewha Woman's U |
| Source: |
International Economic Journal, Summer 2003, v. 17, no. 2, pp. 105-127 |
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Publication Date: |
Summer 2003 |
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Abstract: |
This paper
investigates the relationship between consumption of a durable good and
the interest rate. According to the standard Permanent Income Hypothesis
(PIH), a rise in the interest rate is expected to decrease durables
consumption, and the magnitude of the interest rate effect should meet
certain restrictions. This implication of the PIH is tested using US
data. Empirical results of this paper indicate that, although durables
consumption is negatively correlated with the interest rate, the
magnitude of the estimated effect is substantially smaller than
requested by the standard theory. This suggests that the influence of
monetary policy on durables expenditure may not be as large as previous
authors claim. In attempts to explain the small effects of the interest
rate, frictions such as adjustment costs and liquidity constraints are
examined. |
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