Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets

Alessandro Gavazza and Andrea Lanteri

No 13229, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper 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: (i) indivisible durable goods are vertically differentiated in their quality and (ii) 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: Durable goods; Credit constraints (search for similar items in EconPapers)
JEL-codes: E21 E32 L62 (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets (2021)
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)
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