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  3. American Economic Review: Insights
  4. March 2022
  5. Forward Guidance and Durable Goods Demand

American Economic Review: Insights

ISSN 2640-205X (Print) | ISSN 2640-2068 (Online)

Forward Guidance and Durable Goods Demand

  • Alisdair McKay
  • Johannes F. Wieland
American Economic Review: Insights
vol. 4, no. 1, March 2022
(pp. 106–22)
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Abstract

We study the monetary transmission mechanism in a quantitative fixed-cost model of durable goods demand. We show that aggregate demand is substantially more sensitive to contemporaneous interest rates than to forward guidance about future interest rates. Reducing the real interest rate one year from now increases output by only 41 percent as much as reducing the real interest rate today. The power of forward guidance declines further at longer horizons. We show analytically and quantitatively that this result is driven by the sensitivity of the extensive margin of durable adjustment to the contemporaneous user cost.

Citation

McKay, Alisdair, and Johannes F. Wieland. 2022. "Forward Guidance and Durable Goods Demand." American Economic Review: Insights, 4 (1): 106–22. DOI: 10.1257/aeri.20200804

Additional Materials

JEL Classification

  • D52 Incomplete Markets
  • E21 Macroeconomics: Consumption; Saving; Wealth
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E52 Monetary Policy