New Keynesian Models, Durable Goods and Collateral Constraints

Tommaso Monacelli

No 5916, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: E52 E62 F41 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (8)

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Journal Article: New Keynesian models, durable goods, and collateral constraints (2009)
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