Working Paper: NBER ID: w27956
Authors: Orazio Attanasio; Kieran P. Larkin; Morten O. Ravn; 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 profiles. 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 finding 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 fu- ture expected income and its variability. We find that on top of a large aggregate income shock, life-cycle income profile shocks and wealth shocks are important determinants of consumption choices during the Great Recession.
Keywords: Household Consumption; Great Recession; Car Purchases; Income Shocks; Lifecycle Model
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 |
|---|---|
| aggregate income shock (E10) | decline in consumption expenditures (E20) |
| wealth shocks (G51) | household consumption dynamics (D10) |
| negative shocks to lifecycle income profile (D15) | increased savings (D14) |
| negative expectations about future income growth (D84) | increased savings (D14) |
| idiosyncratic shocks (D89) | decline in car purchases (L62) |
| decline in lifecycle income profile (J26) | decline in car purchases (L62) |