Economic Theory and Durable Goods
A strict consumable good is one that will be consumed (used up) in this period. A durable is something that will last many periods, although you can think of a fraction of it being used up per period. So a new roof is a durable, you'll need to replace it again in 30 years, but 15 years from now you will not have half a roof, you will just have a roof with 15 years left of life.
Megan's blog runs the standard story on durables:
Well, yes and no.Normal economics has two pieces of advice about how to buy consumer durables:1. Buy them when interest rates are low (cheaper to borrow the money; and you weren't going to earn anything at the bank anyway).2. Don't buy them when your income takes a one-time hit (if the 'crops' have been bad the last few years--like they've been since the Great Recession--it's best to focus on buying things that get used up: food, haircuts, doctor visits; you can keep driving the Corolla).Recessions are times when 1 and 2 usually push in opposite directions, but in practice 2 wins the battle: Durable purchases collapse in a recession.
The main durable in the household sector is housing. The price of housing is very much determined by the price of financing -- when financing is cheap housing prices go up, and when financing is expensive, housing prices go down. In other words, housing is an asset for which the levered and unlevered prices are very different.
Therefore, housing, a durable, is a terrible thing to buy when interest rates are low because that means financing is cheap and therefore housing will be expensive. Better to buy a house with a high interest rate loan, for a lower price, and then refinance into lower interest rate loans when rates fall.
But, people buy when money is cheap. If Monetarists want a mechanism by which interest rates impact the economy, this would be it. Low interest rates encourage consumer spending via horizontal credit expansion beacause they use the money to buy housing. That increase in AD then brings the economy into full employment.
However, when the fall in AD is caused by over-consumption of housing due to cheap money, offering more cheap money to buy those assets at their fully leveraged priced is truly pushing on a string. Even more than ZIRP.