Working Paper: NBER ID: w7672
Authors: John V. Leahy; Joseph Zeira
Abstract: This paper analyzes how the decision of when to buy a durable good affects both non-durable consumption and business cycle dynamics. At the individual level, we show that the timing of durable goods purchases plays an important role in smoothing consumption over time. In the benchmark case, the time at which the agent purchases the durable good is the only variable that reacts to changes in wealth, while other variables, such as the consumption of non-durables or the amount of the durable that the individual purchases, remain unchanged. At the aggregate level, we show that timing decisions can serve as a mechanism for the amplification and propagation of aggregate shocks. A decline in wealth causes individuals to delay their durable goods purchases which reduces demand dramatically for some time.
Keywords: No keywords provided
JEL Codes: E21; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| timing of durable goods purchases (L68) | nondurable consumption (E21) |
| decline in wealth (E21) | timing of durable goods purchases (L68) |
| decline in wealth (E21) | nondurable consumption (E21) |