Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets

Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies

Alessandro Gavazza and Andrea Lanteri

The Review of Economic Studies, 2021, vol. 88, issue 6, 2935-2969

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”).

Keywords: Credit constraints; Durable goods; E21; E32; L62 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Credit shocks and equilibrium dynamics in consumer durable goods markets (2021)
Working Paper: Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets (2018)
Working Paper: Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:88:y:2021:i:6:p:2935-2969.

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