Credit shocks and equilibrium dynamics in consumer durable goods markets

Gavazza, Alessandro ORCID: 0000-0001-9236-5813 and Lanteri, Andrea (2021) Credit shocks and equilibrium dynamics in consumer durable goods markets. Review of Economic Studies, 88 (6). 2935 - 2969. ISSN 0034-6527

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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:	12 Dec 2024 02:23
URI:	http://eprints.lse.ac.uk/id/eprint/107605

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