New Keynesian Models, Durable Goods and Collateral Constraints

47 Pages Posted: 29 Dec 2006

See all articles by Tommaso Monacelli

Tommaso Monacelli

Bocconi University - Department of Economics

Date Written: November 2006

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: Durable goods, sticky prices, collateral constraint

JEL Classification: E52, E62, F41

Suggested Citation

Monacelli, Tommaso, New Keynesian Models, Durable Goods and Collateral Constraints (November 2006). CEPR Discussion Paper No. 5916. Available at SSRN: https://ssrn.com/abstract=954145

Tommaso Monacelli (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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