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- Title
Long-term interest rates, wealth and consumption.
- Authors
Cromb, Roy; Fernandez-Corugedo, Emilio
- Abstract
This article focuses on the role of wealth, and the importance of expectations of future interest rates. It examines the sensitivity of the level of consumption to interest rates in a standard partial equilibrium theoretical framework with no uncertainty. The paper illustrates and quantifies two key implications of the theory that are not typically emphasised in the economics literature. First, it shows that wealth effects mean that consumption is much more likely to be negatively related to interest rates than the simple two-period textbook model might suggest. Second, it demonstrates that long-term interest rates are more important than short-term rates -- the sensitivity of consumption to interest rate changes depends crucially on how long these are expected to persist.
- Subjects
UNITED Kingdom; CONSUMPTION (Economics); INVESTMENT interest; ECONOMIC indicators; INTEREST rates; MONETARY policy
- Publication
Bank of England Quarterly Bulletin, 2004, Vol 44, Issue 4, p467
- ISSN
0005-5166
- Publication type
Article