The Federal Reserve has kept interest rates at historic lows for nearly seven years.  But as last week’s rate increase signals — eventually rates will return to their long-term averages. That means both policymakers and the public will once again be asking one of the classic questions in monetary economics: What are the impacts of rising interest rates on the real economy?

In a new working paper  “Interest Rates and the Market for New Light Vehicles,” Adam Copeland, George Hall and Lou Maccini consider this question for the U.S. market for new cars and light trucks. They find strong evidence that rising rates will dampen activity: their model predicts that in the short-run a 100-basis-point increase in interest rates will cause light vehicle production to fall at an annual rate of 12 percent and sales to fall at an annual rate of 3.25 percent.


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