Credit shocks and equilibrium dynamics in consumer durable goods markets

Alessandro Gavazza and Andrea Lanteri

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 (search for similar items in EconPapers)
JEL-codes: E21 E32 L62 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2021-11-01
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-isf and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published in Review of Economic Studies, 1, November, 2021, 88(6), pp. 2935 - 2969. ISSN: 0034-6527

Downloads: (external link)
http://eprints.lse.ac.uk/107605/ Open access version. (application/pdf)

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 (2018)
Working Paper: Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:107605

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().