Bank-created money and consumer durable spending

This study is concerned with the relationship between the phenomena of bank money-creation and the volume of consumer durable spending. In contrast to theoretical and empirical treatments of the monetary transmission which depend upon interest rate effects, net wealth effects, or portfolio adjustment effects, it is argued that monetary forces are important in the determination of consumer durable spending primarily because a significant proportion of consumer durable purchases are financed on installment debt contracts. The volume of consumer durable spending is thus determined partly by the willingness of households to incur contractually enforceable debt obligations and partly by the willingness and/or ability of commercial banks and other installment lenders to accommodate the demand for finance by the household sector. The volume of consumer durable spending is crucially dependent on the existence of mechanisms which provide a regularized flow of installment credit extensions to the household sector.

A partial equilibrium model of consumer credit markets is developed. Of particular concern are the set of variables which condition the household attitude toward debt and the price and general availability of consumer credit. In addition, there is a discussion of the relationship V between Federal Reserve Policy, the price and availability of consumer credit, and the volatility of durable spending. A model of the monetary transmission mechanism is set forth.

An important finding of the study is that changing demand and supply conditions in markets for consumer installment credit are capable of exerting an important influence on the volume of consumer durable spending. Evidence is given in support of the thesis that the contractionary regime adopted by the Federal Reserve in 1979 significantly reduced the profitability of installment lending operations and resulted in a drastic curtailment of consumer credit extensions made by commercial banks between 1979 and 1982. This factor in turn contributed to the major slump in consumer durable goods spending in the 1979-1982 recession.