DP10807 Trading Down and the Business Cycle
|Author(s):||Nir Jaimovich, Sérgio Rebelo, Arlene Wong|
|Publication Date:||September 2015|
|Keyword(s):||business cycle, quality choice, recessions|
|JEL(s):||E2, E3, E4|
|Programme Areas:||Monetary Economics and Fluctuations, Macroeconomics and Growth|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=10807|
We document two facts. First, during recessions consumers trade down in the quality of the goods and services they consume. Second, the production of low-quality goods is less labor intensive than that of high-quality goods. So, when households trade down, labor demand falls, increasing the severity of recessions. We find that the trading-down phenomenon accounts for a substantial fraction of the fall in U.S. employment in the recent recession. We study two business cycle models that embed quality choice and find that the presence of quality choice magnifies the response of these economies to real and monetary shocks.