Hostname: page-component-78c5997874-lj6df Total loading time: 0 Render date: 2024-11-18T18:55:58.782Z Has data issue: false hasContentIssue false
  • English
  • Français

WHAT DO WORKING CAPITAL AND HABIT TELL US ABOUT THE CO-MOVEMENT PROBLEM?

Published online by Cambridge University Press:  24 July 2014

Yi-Chan Tsai
Yi-Chan Tsai*
Affiliation:
National Taiwan University
*
Address correspondence to: Yi-Chan Tsai, Department of Economics, National Taiwan University, 21 Hsu-Chow Road, Taipei 100, Taiwan; e-mail: yichantsai@ntu.edu.tw.
Get access Rights & Permissions [Opens in a new window]

Abstract

Empirical studies find that expenditures on both durable and nondurable goods fall following a contractionary monetary policy shock. However, in standard two-sector models with staggered nondurable goods prices and flexible durable goods prices, consumption of durables rises whereas that of nondurables falls in response to a contractionary policy shock. To resolve this co-movement problem, I extend the model to include a realistic financial friction that firms must pay for their productive inputs prior to production, i.e., working capital, along with habit formation in nondurable goods consumption. Following a positive interest rate shock, the working capital channel raises production costs, thereby discouraging production of both durable and nondurable goods. Furthermore, habit formation induces households to smooth the growth rate of nondurable goods consumption, and hence mitigates the fall in the nondurable goods sector. The model solves the co-movement problem and successfully generates a more sensitive response in the durable goods sector, as observed in the data.

Keywords

DurabilityWorking CapitalHabit FormationSectoral Co-movement
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 1 , January 2016 , pp. 342 - 361
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Barsky, Robert, House, Christopher L., and Kimball, Miles (2003) Do Flexible Durable Goods Prices Undermine Sticky Price Models? NBER working paper 9832.CrossRefGoogle Scholar
Barsky, Robert, House, Christopher L., and Kimball, Miles (2007) Sticky price models and durable goods. American Economic Review 97, 984–998.CrossRefGoogle Scholar
Barth, Marvin J. and Ramey, Valerie A. (2002) The cost channel of monetary transmission. In Bernanke, Ben S. and Rogoff, Kenneth (eds.), NBER Macroeconomics Annual 2001, pp. 199–256. Cambridge, MA: MIT Press.Google Scholar
Boldrin, Michele, Christiano, Lawrence J., and Fisher, Jonas D. M. (2001) Habit persistence, asset returns, and the business cycle. American Economic Review 91, 149–166.CrossRefGoogle Scholar
Bouakez, Hafedh, Cardia, E. and Ruge-Murcia, F.J. (2011) Durable goods, inter-sectoral linkages and monetary policy. Journal of Economic Dynamics and Control 35, 730–745.CrossRefGoogle Scholar
Carlstrom, Charles T. and Fuerst, Timothy S. (2006) Co-movement in Sticky Price Models with Durable Goods. Federal Reserve Bank of Cleveland working paper 0614.Google Scholar
Carlstrom, Charles T. and Fuerst, Timothy S. (2010) Nominal rigidities, residential investment, and adjustment costs. Macroeconomic Dynamics 14, 136–148.CrossRefGoogle Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles (1996) The effects of monetary policy shocks: Evidence from the flow of funds. Review of Economics and Statistics 78, 16–34.CrossRefGoogle Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113, 1–45.CrossRefGoogle Scholar
Coase, R. (1972) Durability and monopoly. Journal of Law and Economics 15, 143–149.CrossRefGoogle Scholar
Cochrane, J. (1994) Shocks. Carnegie–Rochester Conference Series on Public Policy 41, 295–364.CrossRefGoogle Scholar
Dey, Jaya and Tsai, Yi-Chan (2011) Explaining the Durable Goods Co-movement Puzzle with Non-separable Preferences: A Bayesian Approach. Mimeo, National Taiwan University.Google Scholar
Edge, Rochelle M., Laubach, Thomas, and Williams, John C. (2003) The Responses of Wages and Prices to Technology Shocks. Working paper in applied economic theory 2003-21, Federal Reserve Bank of San Francisco.CrossRefGoogle Scholar
Erceg, Christopher and Levine, Andrew (2006) Optimal monetary policy with durable consumption goods. Journal of Monetary Economics 53, 1341–1359.CrossRefGoogle Scholar
Fuhrer, Jeffrey C. (2000) Habit formation in consumption and its implications for monetary policy models. American Economic Review 90, 367–390.CrossRefGoogle Scholar
King, Robert G. and Rebelo, Sergio T. (2000) Resuscitating real business cycles. In Taylor, John B. and Woodford, Michael (eds.), Handbook of Macroeconomics, 1st ed., Vol. 1, Chap. 14, pp. 927–1007. Amsterdam: North-Holland.Google Scholar
Kitamura, Tomiyuki and Takamura, Tamon (2010) Can Sticky Information Solve Comovement Problem in Two-Sector Model with Durable Goods. Mimeo, Bank of Japan.Google Scholar
Monacelli, Tommaso (2009) New Keynesian models, durable goods, and collateral constraints. Journal of Monetary Economics 56, 242–254.CrossRefGoogle Scholar
Neumeyer, Pablo A. and Perri, Fabrizio (2005) Business cycles in emerging economies: The role of interest rates. Journal of Monetary Economics 52, 345–380.CrossRefGoogle Scholar
Ravenna, Federico and Walsh, Carl E. (2006) Optimal monetary policy with the cost channel. Journal of Monetary Economics 53, 199–216.CrossRefGoogle Scholar
Rotemberg, Julio and Woodford, Michael (1997) An optimization-based econometric framework for the evaluation of monetary policy. In Bernanke, Ben S. and Rotemberg, Julio (eds.), NBER Macroeconomics Annual 1997, pp. 297–346. Cambridge, MA: MIT Press.Google Scholar
Smets, Frank and Wouters, Raf (2003) An estimated dynamic stochastic general equilibrium model of the euro area. Journal of the European Economic Association 1, 1123–1175.CrossRefGoogle Scholar
Sterk, V. (2010) Credit frictions and the comovement between durable and nondurable consumption. Journal of Monetary Economics 57, 217–225.CrossRefGoogle Scholar
Sudo, Nao (2012) Sectoral co-movement, monetary-policy shock, and input–output structure. Journal of Money, Credit and Banking 44, 1225–1244.CrossRefGoogle Scholar