Working Paper: CEPR ID: DP15361
Authors: Morten Ravn; Orazio Attanasio; Kieran Larkin; Mario Padula
Abstract: US households' consumption and car purchases collapsed during the Great Recession for reasons that are still poorly understood. In this paper we use the Consumer Expenditure Survey to derive cohort and business cycle decompositions of consumption prfio les. When decomposing the car expenditure data into its extensive and intensive margins, we find that the intensive margin contracted sharply in the Great Recession, a fi nding in stark contrast to conventional wisdom and to the experience of prior recessions. We interpret the evidence through the prism of a very rich life-cycle model where individuals are subject to idiosyncratic uninsurable income shocks, aggregate income shocks, wealth shocks, and credit shocks. We show that, because of their salience and the transaction costs, cars are particularly sensitive to changes in the perception of future expected income and its variability. We find that on top of a large aggregate income shock, life-cycle income pro file shocks and wealth shocks are important determinants of consumption choices during the Great Recession.
Keywords: consumption; durables; adjustment; the great recession
JEL Codes: D12; D14; E21; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| large aggregate income shocks (D39) | collapse of U.S. household consumption (D10) |
| large aggregate income shocks (D39) | decline in car purchases (L62) |
| lifecycle income profile shocks (D15) | collapse of U.S. household consumption (D10) |
| lifecycle income profile shocks (D15) | decline in car purchases (L62) |
| wealth shocks (G51) | collapse of U.S. household consumption (D10) |
| wealth shocks (G51) | decline in car purchases (L62) |
| perception of future income variability (D84) | significant contractions in car purchases (L14) |
| idiosyncratic income shocks (D89) | adjustments in consumption choices (D12) |
| aggregate income fluctuations (E39) | adjustments in consumption choices (D12) |
| younger households (R20) | pronounced consumption adjustments (E21) |
| beliefs about future income (D14) | shaping consumption dynamics during the recession (D12) |