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 the 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 them or scrap them. The model 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, depressing 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 study the effects of collateral constraints and aggregate income shocks, and 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.