Interest Rates and the Market For New Light Vehicles

We study the impact of interest rates changes on both the demand and supply of new light vehicles in an environment where consumers and manufacturers face their own interest rates. Through the estimation of a dynamic stochastic market equilibrium model, we find evidence that rate changes impact the economy through both households and manufacturers. For the impact of rate changes on price and output growth, we show the household channel is quantitatively more important. We then demonstrate that rate changes significantly impact the automobile market; a temporary (but persistent) 100 basis-point increase in both interest rates causes vehicle production to fall by -10.6 percent and sales to fall by -2.4 percent at an annual rate in the short run.