Silvana Tenreyro - London School of Economics
|May 27, 2013|
|5:30 pm||to||7:00 pm|
“Durable Goods and the Transmission Mechanism of Monetary Policy: an Alternative Framework” (joint with Vincent Sterk - UCL)
A large empirical literature has documented statistically significant effects of monetary policy on economic activity. The central explanation for how monetary policy transmits to the real economy relies critically on nominal rigidities, which form the basis of the New Keynesian (NK) framework. A key limitation of the NK model is that, when durable goods are included in the analysis, the model counterfactually predicts that a monetary policy expansion causes a contraction in the durable good sector (and an expansion in the nondurable sector). This paper studies a different transmission mechanism that operates even in the absence of nominal rigidities. Monetary expansions and the subsequent increase in inflation rates generates a negative wealth effect on retired agents and impairs the ability of households to smooth consumption over their life-cycle. It causes working households to work and save more and to front-load their purchases of durable goods in order to avoid the erosion in the value of their savings, thus generating a temporary boom in durables and output, followed by a bust. The model can account for the empirical response of durables to monetary policy interventions, thus complementing the NK paradigm. The model nests the infinitely-lived representative agent model, in which money neutrality holds.