Interest Rates and the Market for New Light Vehicles

43 Pages Posted: 6 Oct 2015  

Adam M. Copeland

Federal Reserve Bank of New York

George J. Hall

Brandeis University - Department of Economics and International Business School; Brandeis University - Department of Economics

Louis J. Maccini

Johns Hopkins University - Department of Economics

Date Written: 2015-09-01

Abstract

We study the impact of interest rates changes on both the demand for 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.

Keywords: interest rates, automobiles, inventories, Bayesian maximum likelihood

JEL Classification: E44, G31

Suggested Citation

Copeland, Adam M. and Hall, George J. and Maccini, Louis J., Interest Rates and the Market for New Light Vehicles (2015-09-01). FRB of New York Staff Report No. 741. Available at SSRN: https://ssrn.com/abstract=2669834 or http://dx.doi.org/10.2139/ssrn.2669834

Adam M. Copeland (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

George J. Hall

Brandeis University - Department of Economics and International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States
781-736-2242 (Phone)

HOME PAGE: http://people.brandeis.edu/~ghall

Brandeis University - Department of Economics ( email )

Waltham, MA 02454-9110
United States

Louis J. Maccini

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States
410-516-7601 (Phone)
410-516-7600 (Fax)

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