Template-Type: ReDIF-Paper 1.0
Author-Name: Leo Michelis
Author-X-Name-First: Leo
Author-X-Name-Last: Michelis
Author-Email: michelis@ryerson.ca
Author-Workplace-Name: Department of Economics, Ryerson University, Toronto, Canada
Author-Name: Ugochi T. Emenogu
Author-X-Name-First: Ugochi
Author-X-Name-Last: Emenogu
Author-Email: UEmenogu@bank-banque-canada.ca
Author-Workplace-Name: Bank of Canada, Ottawa, Canada
Title: Financial Frictions, Durable Goods and Monetary Policy
Abstract:  This paper examines the effect of financial frictions on the consumption of durables and non-durables in a two-sector DSGE model with sticky prices and heterogeneous agents. The financial frictions are a combination of loan-to-value (LTV) and payment-to-income (PTI) constraints faced by borrowers. In this setting a monetary contraction reduces drastically the maximum amount that consumers can borrow in order to purchase durable goods. As a result, the model predicts that the consumption of durables falls, along with non-durables even when durable prices are fully flexible. Also output falls and the nominal interest rate increases following a monetary tightening. Thus, the model matches better the predictions of the model with the data, relative to the existing literature.
Classification-JEL: E44; E52
Keywords: Durable goods, Sticky prices, Financial frictions, Monetary policy 
Length: 29 pages
Creation-Date: 2019-01
Number: 075
File-URL: http://economics.ryerson.ca/workingpapers/wp075.pdf
File-Format: Application/pdf
Handle: RePEc:rye:wpaper:wp075