Discussion Paper Details

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Title: Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets

Author(s): Alessandro Gavazza and Andrea Lanteri

Publication Date: October 2018

Keyword(s): credit constraints and Durable goods

Programme Area(s): Industrial Organization and Monetary Economics and Fluctuations

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: (1) different qualities of durable goods trade on secondary markets at market-clearing prices; and (2) households endogenously choose when to trade or scrap them. 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'').

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Bibliographic Reference

Gavazza, A and Lanteri, A. 2018. 'Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets'. London, Centre for Economic Policy Research.