The 2008 US Auto Market Collapse
Bill Dupor (),
M. Saif Mehkari,
Rong Li and
Yi-Chan Tsai ()
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M. Saif Mehkari: University of Richmond
Rong Li: Renmin University of China
No 66, 2019 Meeting Papers from Society for Economic Dynamics
New vehicle sales in the U.S. fell nearly 40 percent during the last recession, causing significant job losses and unprecedented government interventions in the auto industry. This paper explores two potential explanations for this decline: falling home values and falling households’ income expectations. First, we establish that declining home values explain only a small portion of the observed reduction in household new vehicle sales. Using a county-level panel from the episode, we find: (1) A one-dollar fall in home values reduced household new vehicle spending by 0.5 to 0.7 cents and overall new vehicle spending by 0.9 to 1.2 cents; and (2) Falling home values explain between 16 and 19 percent of the overall new vehicle spending decline. Next, examining state-level data from 1997-2016, we find: (3) The short-run responses of new vehicle consumption to home value changes are larger in the 2005-2011 period relative to other years, but at longer horizons (e.g. 5 years), the responses are similar across the two sub-periods; and (4) The service flow from vehicles, as measured by miles traveled, responds very little to house price shocks. We also detail the sources of the differences between our findings (1) and (2) from existing research. Second, we establish that declining current and expected future income expectations potentially played an important role in the auto market’s collapse. We build a permanent income model augmented to include infrequent, repeated car buying. Our calibrated model matches the pre-recession distribution of auto vintages and the liquid-wealth-to-income ratio, and exhibits a large vehicle sales decline in response to a mild decline in expected permanent income due to a transitory slowdown in income growth. In response to the shock, households delay replacing existing vehicles, allowing them to smooth the effects of the income shock without significantly adjusting the service flow from their vehicles. Combining our negative results regarding housing wealth with our positive model-based findings, we interpret the auto market collapse as consistent with existing permanent income based approaches to durable goods purchases (e.g., Leahy and Zeira (2005)).
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Working Paper: The 2008 U.S. Auto Market Collapse (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:66
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