Working Paper: CEPR ID: DP13229
Authors: Alessandro Gavazza; Andrea Lanteri
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
JEL Codes: E21; E32; L62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tightening of borrowing limits (F65) | Postponement of scrapping and upgrading low-quality cars (L15) |
| Postponement of scrapping and upgrading low-quality cars (L15) | Decrease in demand for mid-quality cars (D12) |
| Decrease in demand for mid-quality cars (D12) | Reduction in replacement incentives for wealthy households (H31) |
| Reduction in replacement incentives for wealthy households (H31) | Decrease in new car sales (E32) |
| Decrease in demand for mid-quality cars (D12) | Decrease in new car sales (E32) |
| Declining mid-quality car prices (L15) | Reduction in new car sales (F69) |