E40 | Macro Paper Warehouse

Consumer durables and monetary policy according to HANK

Mon, 01 Jan 0001 00:00:00 +0000

Layer 1 — Overview

Research Question

Consumer durables account for a disproportionately large share of household expenditure fluctuations despite their small share of total private consumption. Two stylized facts motivate the paper: (1) durable expenditure is far more interest-rate sensitive than nondurable expenditure following monetary policy shocks, and (2) durable and nondurable expenditures comove positively and persistently—both reaching trough in the same quarter. Standard two-sector New Keynesian models struggle to generate this positive conditional comovement because asymmetric sectoral price rigidity induces large relative-price movements that push the two sectors in opposite directions. This paper asks what model features are necessary and sufficient to reproduce both the sectoral comovement pattern and the hump-shaped aggregate dynamics observed in the data, and how the answer changes across households sorted by liquid asset holdings.

Data and Methodology

Empirical identification. The authors employ a local projection instrumental variables (LP-IV) strategy using Romer-Romer monetary policy shocks updated by Wieland and Yang (2020), over the sample 1969:Q1–2007:Q3. Impulse response functions (IRFs) are normalized to a cumulative 100 basis-point increase in the Federal Funds Rate over five years. Household-level evidence is drawn from the Consumer Expenditure Survey (CEX) and the Survey of Consumer Finances (SCF); households are classified as liquidity-constrained if liquid assets are below $1,000.

Model. The authors develop a two-sector Heterogeneous Agent New Keynesian (HANK) model in which households maximize utility over nondurable consumption and a durable stock (Cobb-Douglas aggregation), face convex adjustment costs on durable purchases, and update expectations infrequently in the Mankiw-Reis sense (probability of not updating: Xi = 0.918 per period). The general equilibrium version features asymmetric Rotemberg price stickiness (Calvo probability 0.671 for nondurables, 0.797 for durables), nominal wage stickiness (Calvo 0.802), and a Taylor rule with inflation coefficient 1.105, output coefficient 1.440, and smoothing 0.988.

Main Findings and Quantitative Magnitudes

Sectoral magnitude gap. At trough (approximately 8 quarters after the shock), the durable expenditure response to monetary tightening is an order of magnitude larger than the nondurable response—a fact the calibrated HANK model is designed to match.
Positive comovement. Both durable and nondurable expenditures contract and reach trough in the same quarter, contradicting TANK models (Monacelli 2009) in which savers shift portfolios toward durables and generate negative comovement for that group.
Relative-price dynamics. The relative price of durables rises following monetary tightening (nondurables deflate more), but the rise is modest and cannot overturn the positive comovement result.
Role of the direct interest-rate effect. Across liquid-asset groups, the direct effect accounts for 73–87% of the cumulated durable expenditure response and 37–91% of the cumulated nondurable expenditure response. This direct channel—operating through intertemporal substitution—is quantitatively first-order for durables in a way it is not in standard single-sector HANK models where income effects dominate.
Role of sticky information. A full-information HANK variant produces a counterfactually high durable elasticity (35.24 times the baseline) and no hump-shaped dynamics. Infrequent information updating (Xi = 0.918) is essential to match the hump-shaped propagation of both sectoral and aggregate expenditures.
Income effects and fiscal policy. For a fiscal subsidy specifically targeting durable purchases, intertemporal substitution incentives generate a large shift toward durables and, without income effects, a counterfactual crowding-out of nondurable spending. Income effects are essential to protect nondurable spending, and the aggregate consumption effect of such a policy is at best modest—consistent with Mian and Sufi’s (2012) evidence on cash-for-clunkers.

Scope Conditions

All empirical results are conditional on the LP-IV sample 1969:Q1–2007:Q3 and Romer-Romer shocks as instrumented by Wieland-Yang. The household-level comovement result is established for both liquidity-constrained (liquid assets below $1,000) and unconstrained savers using CEX/SCF data. Model quantitative results are specific to the calibration targeting moments from Fagereng et al. (2021) marginal propensities and BEA depreciation data (delta = 0.054).

Layer 2 — Q&A

Q1: What is the core empirical puzzle the paper addresses, and why do standard models fail? Standard two-sector New Keynesian models predict that asymmetric sectoral price stickiness generates large relative-price movements between durables and nondurables following a monetary shock. These relative-price shifts tend to produce negative conditional comovement—when durables contract, nondurables expand—contradicting the data. The authors document that both categories exhibit positive and persistent comovement, both reaching their trough at approximately 8 quarters, which standard models cannot replicate.

Q2: What are the key empirical facts established via LP-IV? Using Romer-Romer shocks over 1969:Q1–2007:Q3, normalized to a cumulative 100bp Federal Funds Rate increase, the authors find: (1) aggregate expenditure follows a hump-shaped contraction with trough at roughly 8 quarters; (2) the durable expenditure response is an order of magnitude larger than the nondurable response at trough; (3) both categories reach their trough in the same quarter; and (4) the relative price of durables rises modestly after monetary tightening (nondurables deflate more), but not enough to reverse comovement.

Q3: How is the partial equilibrium model calibrated, and which moments does it target? Key calibrated parameters include CRRA sigma = 2.640, Cobb-Douglas weight on nondurables theta = 0.607 (implying durable expenditure share 0.193), adjustment cost alpha = 8.299, information stickiness Xi = 0.918, depreciation rate delta = 0.054, steady-state real rate r = 0.03/4, discount factor beta = 0.915 (matching a 30% share of liquidity-constrained households with liquid assets-to-income ratio of 0.26), and borrowing wedge kappa = 0.05. Moments matched include quarterly MPC on nondurables (22.94%), quarterly MPX on durables (24.15%), interest-rate elasticity of durable expenditure (3.35, within the empirical range of 1.1–5.0), price elasticity of durable demand (29.59), and durable stock skewness relative to nondurable consumption (0.695, consistent with Bertola et al. 2005).

Q4: How does the paper decompose monetary policy transmission? The paper decomposes transmission into three channels: (1) the direct effect of real interest rate changes, which operates through intertemporal substitution and accounts for the quantitatively largest share of the durable response; (2) the relative-price effect, which is modest and redistributive but cannot overturn positive comovement; and (3) pure income effects, which are key for persistence of the nondurable response but not for the sign of comovement.

Q5: What do counterfactual models reveal about the role of each model ingredient? A sticky-information RANK produces positive comovement but the dynamics are front-loaded and less inertial than in the data. A sticky-information TANK delivers results similar to RANK—income effects do not qualitatively change the story. A full-information HANK produces a counterfactually high durable interest-rate elasticity (35.24 times the baseline) and no hump-shaped dynamics, demonstrating that sticky information is the ingredient generating realistic propagation, not heterogeneity per se.

Q6: What does the household-level evidence from CEX and SCF show about comovement across the wealth distribution? Classifying households as liquidity-constrained if liquid assets are below $1,000, the LP-IV estimates show positive comovement between durables and nondurables for both constrained and unconstrained savers. This contradicts TANK models (Monacelli 2009), in which savers shift portfolios toward durables following a monetary shock, generating negative comovement for the saver group. After controlling for income and relative prices, the direct interest-rate effect operates uniformly across financial status groups.

Q7: How does the direct effect vary across liquid asset groups quantitatively? Decomposing across four liquid asset groups (below $1k, $1k–$10k, $10k–$20k, above $20k), the direct effect accounts for 73–87% of the cumulated durable expenditure response and 37–91% of the cumulated nondurable expenditure response. Income effects are more important for nondurable spending prolongation among liquidity-constrained households, but the direct channel dominates durable expenditure for all groups.

Q8: How does the general equilibrium two-sector HANK model differ from the partial equilibrium setup? The GE model adds asymmetric sectoral price stickiness (Calvo probabilities 0.671 for nondurables and 0.797 for durables), nominal wage stickiness (Calvo 0.802), a Taylor rule (inflation coefficient 1.105, output coefficient 1.440, smoothing 0.988), and fiscal lump-sum taxes responding to debt (coefficient 0.191). These features generate the relative-price dynamics observed in the data while preserving the positive comovement result.

Q9: What does the fiscal policy application reveal about the role of income effects? A fiscal subsidy targeting durable purchases generates a much larger shift in the relative price of durables than monetary policy does. Without income effects, intertemporal substitution dominates and nondurable spending falls—a counterfactual result inconsistent with the data. With income effects present, nondurable spending is protected. The aggregate consumption effect of such a durable-targeted fiscal policy is at best modest, consistent with Mian and Sufi’s (2012) evidence from the cash-for-clunkers program.

Q10: What is the broader implication for the literature on HANK versus RANK transmission? In standard single-sector HANK models, income effects (the indirect channel) typically dominate monetary transmission. The presence of consumer durables restores a quantitatively important role for the direct interest-rate channel, which operates through intertemporal substitution in durable purchases. This rebalances the direct-versus-indirect decomposition relative to the conventional HANK wisdom and shows that the durable goods sector is essential to understanding the full transmission mechanism.

Key Concepts

Sectoral comovement (conditional on monetary policy shocks) The empirical regularity that durable and nondurable expenditures both contract following monetary tightening and reach their respective troughs in the same quarter. In this paper, comovement is defined conditional on identified monetary policy shocks (LP-IV with Romer-Romer instruments), not unconditionally. Standard two-sector NK models predict negative conditional comovement due to relative-price effects; replicating positive comovement is the central discipline imposed on the model.

Direct effect (of real interest rate changes) The component of monetary transmission that operates through the intertemporal substitution incentive induced by changes in the real interest rate, holding income and relative prices fixed. Distinct from the income effect (indirect channel) and the relative-price effect. In this paper’s decomposition, the direct effect accounts for 73–87% of the cumulated durable expenditure response across liquid-asset groups.

Sticky information (Mankiw-Reis) Households update their information sets infrequently, with probability (1 - Xi) per period; Xi = 0.918 means only about 8.2% of households update each quarter. This mechanism is essential in the model for generating the hump-shaped, inertial impulse response dynamics observed in the data. Without it (full-information HANK), the durable elasticity is counterfactually large (35.24 times baseline) and dynamics are front-loaded.

MPX (Marginal Propensity to Expend on durables) Analogous to the MPC for nondurables, the MPX measures the additional durable expenditure flow induced by an income windfall. Calibrated to 24.15% quarterly, matching estimates from Fagereng et al. (2021). Distinct from the MPC because durable purchases represent investment in a stock, not immediate consumption flow.

Liquidity-constrained households Households with liquid assets below $1,000, identified in the CEX and SCF. In the model, the 30% share of such households is targeted by the discount factor (beta = 0.915) and the borrowing wedge (kappa = 0.05). The paper’s key finding is that positive comovement holds for both constrained and unconstrained households, contradicting TANK predictions.

HANK (Heterogeneous Agent New Keynesian model) A New Keynesian general equilibrium model in which households are heterogeneous in their liquid asset holdings (and thus face binding borrowing constraints), so that the distribution of assets matters for aggregate dynamics. Distinguished from RANK (Representative Agent NK) and TANK (Two-Agent NK, which approximates heterogeneity with one unconstrained and one hand-to-mouth agent). In this paper, HANK is extended to a two-sector setting with durables and nondurables.

Convex adjustment costs on durable purchases A cost of adjusting the durable stock that is convex in the size of the adjustment (calibrated parameter alpha = 8.299). This smooths the durable expenditure response and prevents counterfactually sharp jumps in durable purchases following interest rate changes, contributing to realistic propagation dynamics alongside sticky information.

Debasements and Small Coins: An Untold Story of Commodity Money

Mon, 01 Jan 0001 00:00:00 +0000

This paper applies a multiple-denomination commodity money model — building on Lee, Wallace, and Zhu (2005) — to coinage episodes in late medieval England, and derives two main findings. Shortages of small coins are severely inconvenient because halfpennies and farthings serve not merely as small change but as consumption-smoothing instruments: parameterized to 15th-century England (per-capita silver approximately 35 grams, penny approximately 1 gram), the model shows that adding a halfpenny is highly welfare-improving for poor agents even at infrequent expenditure, and welfare-improving for all agents when monetary transactions occur at least twice weekly. Debasing the penny by 50 percent has approximately the same welfare effect as introducing a halfpenny and replicates the three stylized facts of the debasement puzzle — large minting volumes, cocirculation of old and new coins, and no additional mint inducement — as equilibrium outcomes rather than paradoxes. However, full-bodiedness creates a commitment device against over-issuance that cannot be replicated by sufficiently small coins, since precious metals have a practical lower bound on coin content, so debasement relieves but does not solve the structural small-coin problem, pointing to the historical necessity of a transition to fiat money.

Summary of a forthcoming paper, AI-assisted and human-reviewed. See the linked original for the authoritative claims and full conditions.

In depth

Q1. What is the debasement puzzle and how does the paper resolve it?

The debasement puzzle, documented by Rolnick, Velde, and Weber, consists of three facts: following a debasement, minting volumes rose sharply, old and new coins cocirculated sometimes by weight, and yet people still paid minting fees rather than receiving inducements — all of which are puzzling because the absence of an inducement suggests no straightforward arbitrage. The paper resolves the puzzle by modeling a debasement as equivalent to introducing a new denomination: it draws agents to the mint because it supplies the welfare-improving small denomination that agents wanted, not because of a price arbitrage. Cocirculation by weight emerges naturally along the equilibrium path because agents hold both old and new coins in optimal portfolios, and the counterfactual welfare calculation shows the welfare gain from eliminating the shortage is large, explaining why agents willingly pay minting fees to obtain the new coins.

Q2. How does the paper measure the inconvenience of a coin shortage?

The paper measures inconvenience as the welfare difference between the shortage equilibrium and a hypothetical scenario in which the mint suddenly eliminates the shortage — an unanticipated shock that adds the missing denomination to the coinage structure. This counterfactual is tractably computable in the model and directly mirrors the intuition of a historical agent who compares their constrained experience to the imagined experience of having access to the missing coins. Applied to the penny, the model shows that adding a halfpenny (debasing the penny by 50 percent) yields a welfare gain equivalent to the full shortage inconvenience; the result is large for poor agents even at once-monthly expenditure and extends to all agents when transactions are at least twice weekly.

Q3. Why can debasement not permanently solve the small-coin problem?

Full-bodied coinage — coins whose face value equals their precious-metal content — constrains the minimum viable coin size: very small coins are practically too easy to counterfeit and too difficult to handle, so debasement merely pushes the lower denomination boundary down without eliminating it. The model uses this practical indivisibility of precious metals as the structural constraint that prevents an infinite regress of smaller and smaller coins. This constraint points to why fiat money — which severs the link between value and metallic content — ultimately emerged as the only way to provide arbitrarily small denominations at negligible production cost. The paper frames this as the resolution to the historical “big problem of small change.”

Key concepts

debasement puzzle : the simultaneous occurrence of unusually large minting volumes and cocirculation of old and new coins following a debasement, without any additional mint inducement; resolved in this paper as the equilibrium response to supplying a welfare-improving small denomination.

full-bodiedness : the property of commodity coins whose face value equals their precious-metal content; acts as a commitment device against over-issuance in the model but creates a practical indivisibility constraint on the minimum coin size.

multiple-denomination model : the Lee-Wallace-Zhu framework extended in this paper; explains the social demand for multiple coin denominations via wide transaction-value heterogeneity and the burden of carrying many coins.

Political Pressure on the Fed

Mon, 01 Jan 0001 00:00:00 +0000

This paper combines a hand-collected archival data set of over 800 personal interactions between U.S. Presidents and Federal Reserve officials from 1933 to 2016 with a narrative structural VAR to identify shocks to political pressure on the Fed and quantify their macroeconomic effects. The identification strategy exploits the well-documented Nixon-Burns episode of 1971—corroborated by Nixon Tapes recordings and Burns’s personal diary—as a narrative restriction that the spike in personal interactions that year was driven primarily by a political pressure shock rather than by economic conditions. Political pressure shocks are found to (i) increase inflation strongly and persistently, (ii) lead to statistically weak negative effects on activity, (iii) contribute to inflationary episodes outside the Nixon era, and (iv) transmit differently from standard expansionary monetary policy shocks because political pressure can be publicly observed, generating a stronger direct effect on inflation expectations. Quantitatively, increasing political pressure by half as much as Nixon, sustained for six months, is estimated to raise the price level by more than 8%.

Summary of a forthcoming paper, AI-assisted and human-reviewed. See the linked original for the authoritative claims and full conditions.

In depth

Q1. What is the narrative identification strategy and how is the Nixon-Burns episode exploited?

The identification strategy imposes that the spike in President-Fed personal interactions in 1971 is mainly driven by a political pressure shock, exploiting the well-documented fact that Nixon pressured Burns to ease monetary policy in the run-up to his 1972 re-election. Recordings from the “Nixon Tapes” and Burns’s personal diary corroborate this interpretation: Burns wrote that “the President will do anything to be reelected” and that Nixon urged him to “start expanding the money supply.” Romer and Romer (2004) estimated large easing shocks to monetary policy prior to Nixon’s re-election, contrasting with a large systematic tightening after it, further supporting that Burns eased in response to the pressure. Narrative evidence from Johnson’s pressure in the 1960s is additionally used to strengthen the identification.

Q2. What does the new data on President-Fed personal interactions show?

The paper hand-collects over 800 personal interactions between U.S. Presidents and Fed officials from the historical daily schedules made available by the Presidential Libraries from Franklin D. Roosevelt (1933) through Barack Obama (2016). The average interaction lasts 53 minutes; 36% are one-on-one; 11% occur on weekends; 16% are in social settings such as dinners; 92% involve the Fed Chair and 8% other Fed officials. There is large variation across administrations: President Nixon interacted with Fed officials 160 times, while only 6 interactions occurred under Clinton. These interactions arise endogenously in response to economic conditions, which is why narrative identification is needed to isolate the political pressure component.

Q3. What are the estimated macroeconomic effects of political pressure shocks?

Political pressure shocks are found to increase inflation strongly and persistently, to have statistically weak negative effects on activity, and a pressure shock half as large as Nixon’s sustained over six months is estimated to raise the price level by more than 8%. The weak activity effect distinguishes these shocks from standard demand expansions; the mechanism operates more through expectations channels than through aggregate demand, consistent with the public observability of political pressure on the central bank. The evidence also suggests political pressure shocks contributed to inflationary episodes in periods beyond the Nixon era.

Q4. Why do political pressure shocks transmit differently from conventional monetary policy easing shocks?

Political pressure shocks transmit differently from standard expansionary monetary policy shocks primarily because political pressure on the Fed can be publicly observed, which generates a stronger direct effect on inflation expectations than a private Fed decision to ease. The paper finds a stronger effect of political pressure shocks on inflation expectations relative to the activity effect, consistent with this channel: when the public observes that the President is pressuring the central bank, expected inflation rises even before the Fed acts on that pressure.

Key concepts

President-Fed personal interactions : face-to-face or telephone contacts between U.S. Presidents and Federal Reserve officials recorded in historical presidential daily schedules 1933–2016; used as a noisy observable proxy for political attention to the Fed, from which a political pressure shock series is extracted via narrative restrictions.

political pressure shock : an exogenous, structurally identified shock to the intensity of political influence on Fed policy, isolated using a narrative SVAR restriction that the 1971 Nixon-Burns spike in interactions was driven by political pressure rather than economic conditions.

narrative identification : an approach that imposes sign or zero restrictions on a structural VAR at specific historical episodes known from external archival evidence to be driven predominantly by a particular structural shock; here used to exploit the Nixon-Burns and Johnson-Fed pressure episodes.