Consumer Durables in T(H)ANK Economies

Introducing consumer durables in otherwise standard one-sector heterogeneous-agent New Keynesian economies—where some consumers may infrequently participate in financial markets—drastically affects some fundamental properties of these frameworks, in the face of monetary policy shocks. Along with producing utility from a stream of services, durables may be used as a store of value, thus facilitating the emergence of a risk-sharing condition that links nondurable purchases of savers and liquidity-constrained households. Factors typically key in shaping monetary transmission in benchmark one-sector economies—such as fiscal transfers from liquidity unconstrained to constrained households—only affect household-specific durable expenditure, while having no effects in the aggregate. Accounting for illiquidity in durable adjustment makes fiscal transfers non-neutral, both at the household and at the sectoral level. Moreover, fiscal redistribution amplifies the response of GDP to monetary shocks, unlike what found in economies featuring nondurable production only.