The Demand for Consumer Durables

ANY ADVOCATE OF MONETARY ACTIVISM has several shoals to navigate. First is the challenge to explain how money works. The numerous channels through which monetary policy actions influence economic activity remain popular topics for research. One such channel is investigated below. Our catalog of the black box's contents has grown and continues to do so. Second, in exploring how money works, we face a possible constraint on the channels from Friedman's permanent income hypothesis (PIH). Since well over half of GNP is consumption expenditures, the PIH's implication that consumption is nearly immune to short-run policy shocks appears to undermine activist arguments. Finally, rational expectations models of the economy that include policy actions as direct determinants of economic behavior imply that activism is futile. These models assume that there is no nonprice credit rationing. Literature on why nonprice rationing may be optimal and evidence that it occurs refutes that assumption. The channel by which monetary activism influences economic activity investigated in this paper is the demand for consumer durables. The separability of durables services from durables purchases implies that the PIH consumption juggemaut can coexist with highly variable consumption expenditures. Consequently, the timing determinants of durables purchases are important as well as the level determinants.