Durable Goods, Borrowing Constraints and Consumption Insurance

Josep Pijoan-Mas and Enzo Cerletti

No 9035, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper we study the transmission of income shocks into nondurable consumption in the presence of durable goods. We use a standard a life-cycle model with two goods to characterize the interaction of durability of goods, durability of shocks, and borrowing constraints as determinants of shock transmission. We show that borrowing constraints lead to a substitution between durable and non-durable goods upon arrival of an unexpected income change. This substitution biases the conventional measures of insurance based on the response of non-durable consumption to income changes. The sign of this bias depends critically on the persistence of the shock. We show that households have less insurance against transitory shocks and more insurance against permanent shocks than commonly measured. We calibrate the model economy to the US in order to measure the size of this bias.

Keywords: Borrowing constraints; Consumption insurance; Durable goods; Incomplete markets; Persistence of income shocks (search for similar items in EconPapers)
JEL-codes: D12 D91 E21 (search for similar items in EconPapers)
Date: 2012-07
New Economics Papers: this item is included in nep-dge and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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