Thursday, April 26, 2012

Winterspeak — Economic Theory and Durable Goods

...people buy [durables] when money is cheap. If Monetarists want a mechanism by which interest rates impact the economy, this would be it. Low interest rates encourage consumer spending via horizontal credit expansion because they use the money to buy housing. That increase in AD then brings the economy into full employment.
However, when the fall in AD is caused by over-consumption of housing due to cheap money, offering more cheap money to buy those assets at their fully leveraged priced is truly pushing on a string. Even more than ZIRP.
Read it at
Economic Theory and Durable Goods
by Winterspeak

Monetary policy operates through the housing channel. Except when it doesn't, and then it just doesn't do much.

(Winterspeak asserts although housing is booked as investment,  it really acts more as a durable good for consumers.)

No comments: