DP5916 New Keynesian Models, Durable Goods and Collateral Constraints
|Publication Date:||October 2006|
|Keyword(s):||collateral constraint, durable goods, sticky prices|
|JEL(s):||E52, E62, F41|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=5916|
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.