The effects of monetary policy on the consumption of durables and nondurables in the US -

Abstract

I studied in this thesis, the effects of inflation on the consumption of durables and nondurables in the US to uncover the role of durables consumption in the dynamics of monetary policy transmission channels. The model developed by Mansoorian and Michelis (2010) that introduces money through a cash-in-advance constraint predicts that a rise in inflation requires an increase in the marginal rate of substitution of durables for nondurables. I examined empirically this prediction for the US and found that empirical results concurs with what the theory predicts. I found that in the long run a rise in inflation by 1percent leads to an increase in the consumption of durables by 0.1percent. Also, I found that durables are three times more responsive to monetary shocks than nondurables. My findings are at odds with Monacelli’s (2009) results who found that durables respond negatively to a monetary shock. The reason of this contradiction is that Monacelli used VAR in levels despite the fact that the variables are not stationary.