Consumer durables and money supply shocks
Potts, Todd Brandon
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This dissertation has two goals. The first goal is to empirically estimate the response the real price of various consumer durable goods to exogenous changes in the nominal money supply. The second is to analytically solve different dynamic equilibrium models of consumer durable goods for an approximate solution for the equilibrium real price of durables and then to test the predictive power of these models concerning the dynamic response of this equilibrium price to exogenous shocks to the nominal money supply. The first goal is achieved using a VAR approach that takes advantage of a general set of restrictions that is consistent with a wide body of existing literature on VAR identification. The second goal is reached by replacing the equations of the dynamic models with linear approximations. Comparing the estimated price responses obtained from the just identified VARs to the theoretical price response to a money supply shock predicted by these models performs the aforementioned tests. This dissertation finds that both the real price of consumer durables and the real quantity of consumer durables increase in the short run in response to an exogenous shock to the money supply. Also, dynamic equilibrium models of consumer durables do a relatively effective job of matching the predictions obtained from the VAR. These results hold true whether aggregate consumer durable goods are analyzed or new automobiles.