NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Consumer Spending and the After-Tax Real Interest Rate

N. Gregory Mankiw

NBER Working Paper No. 1991 (Also Reprint No. r0986)
Issued in August 1986
NBER Program(s):   PE

This paper examines the interaction between consumer durable goods and

consumer non-durable goods in determining the responsiveness of total

expenditure to the after-tax real interest rate. The introduction of

consumer durables into the consumer's decision problem can have important

effects on the interest elasticity of total spending. The channel

highlighted here might be called the "user cost effect," in that the

after-tax interest rate enters the implicit user cost of consumer durable

goods. Even if a consumer has a one-period planning horizon, possibly

because of a binding borrowing constraint, the user cost effect may

nonetheless make his spending highly interest sensitive. Finally, the

paper examines the response of the level and composition of consumer

spending to the high real interest rates experienced in the early 1980s.

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Document Object Identifier (DOI): 10.3386/w1991

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Mankiw Consumer Spending and the After-Tax Real Interest Rate
Mankiw Consumer Spending and the After-Tax Real Interest Rate
 
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