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Credit shocks and equilibrium dynamics in consumer durable goods markets

Gavazza, Alessandro and Lanteri, Andrea (2021) Credit shocks and equilibrium dynamics in consumer durable goods markets. Review of Economic Studies. ISSN 0034-6527

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Identification Number: 10.1093/restud/rdab004

Abstract

This article studies equilibrium dynamics in consumer durable goods markets after aggregate credit shocks. We introduce two novel features into a general-equilibrium model of durable consumption with heterogeneous households facing idiosyncratic income risk and borrowing constraints: (1) indivisible durable goods are vertically differentiated in their quality and (2) trade on secondary markets at market-clearing prices, with households endogenously choosing when to trade or scrap their durables. The model highlights a new transmission mechanism for macroeconomic shocks and successfully matches several empirical patterns that we document using data on U.S. car markets around the Great Recession. After a tightening of the borrowing limit, debt-constrained households postpone the decision to scrap and upgrade their low-quality cars, which depresses mid-quality car prices. In turn, this effect reduces wealthy households’ incentives to replace their mid-quality cars with high-quality ones, thereby decreasing new-car sales. We further use our framework to evaluate targeted fiscal stimulus policies such as the Car Allowance Rebate System in 2009 (“Cash for Clunkers”).

Item Type: Article
Official URL: https://academic.oup.com/restud
Additional Information: © 2021 The Authors
Divisions: Economics
Subjects: H Social Sciences > HG Finance
H Social Sciences > HC Economic History and Conditions
JEL classification: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
L - Industrial Organization > L6 - Industry Studies: Manufacturing > L62 - Automobiles; Other Transportation Equipment
Date Deposited: 07 Dec 2020 11:51
Last Modified: 29 Jul 2021 14:00
URI: http://eprints.lse.ac.uk/id/eprint/107605

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