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Cyclical drivers of euro area consumption: what can we learn from durable goods?

Georgi Krustev and André Casalis ()

No 2386, Working Paper Series from European Central Bank

Abstract: We study the cyclical dynamics of consumption in the euro area (EA) and the large EA countries by distinguishing durable from nondurable expenditures. We adopt a theoretical partial equilibrium framework to justify the identification strategy of our empirical model, a time-varying parameter structural vector autoregression (TVP-SVAR). Following the main insight from the theoretical model, that liquidity constraints induce important interactions between durables and nondurables, we distinguish durable-specific demand and supply shocks, while taking into account monetary and credit conditions. Our main findings are: (i) durables react faster and more strongly than nondurables after monetary shocks in the euro area and in the largest EA countries, a confirmation of an outcome commonly reported for the US; (ii) there is a large degree of cross-country heterogeneity in how different factors (including durable-specific ones) explain consumption; (iii) the strength of spillovers from durable to nondurable consumption, as predicted by theory, is empirically correlated with how much households across countries are likely to be liquidity constrained. JEL Classification: C11, C32, D11, E21, E32

Keywords: consumption; durable goods; sign restrictions; SVARs (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-eec, nep-mac and nep-opm
Note: 2215397
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Journal Article: Cyclical drivers of euro area consumption: What can we learn from durable goods? (2022) Downloads
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