Consumption Dynamics During Recessions

David Berger and Joseph Vavra

No 20175, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Are there times when durable spending is less responsive to economic stimulus? We argue that aggregate durable expenditures respond more sluggishly to economic shocks during recessions because microeconomic frictions lead to declines in the frequency of households' durable adjustment. We show this by first using indirect inference to estimate a heterogeneous agent incomplete markets model with fixed costs of durable adjustment to match consumption dynamics in PSID microdata. We then show that aggregating this model delivers an extremely procyclical Impulse Response Function (IRF) of durable spending to aggregate shocks. For example, the response of durable spending to an income shock in 1999 is estimated to be almost twice as large as if it occurred in 2009. This procyclical IRF holds in response to standard business cycle shocks as well as in response to various policy shocks, and it is robust to general equilibrium. After estimating this robust theoretical implication of micro frictions, we provide additional direct empirical evidence for its importance using both cross-sectional patterns in PSID data as well as time-series patterns from aggregate durable spending.

JEL-codes: D91 E21 E32 (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-dge and nep-mac
Note: EFG
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Citations: View citations in EconPapers (9)

Published as David Berger & Joseph Vavra, 2015. "Consumption Dynamics During Recessions," Econometrica, Econometric Society, vol. 83, pages 101-154, 01.

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