Substitution between monetary assets and consumer goods: New evidence on the monetary transmission mechanism

This paper presents important new evidence on the monetary transmission mechanism in the context of the degree of substitution across UK monetary assets and consumption goods. Specifically, our empirical results show that durable goods expenditures are a relatively powerful element of the monetary transmission mechanism with semi-durables consumption having a somewhat smaller impact. Our results also provide an explanation for the “puzzle” that the nominal expenditure share of durables has remained relatively stable in recent years while the real expenditure share has increased dramatically. In addition, this paper demonstrates that the potential bias in substitution estimates from using artificial break-adjusted monetary data can be reduced by using the relatively new non-break adjusted monetary data produced by the Bank of England.