DP13229 Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets

Author(s): Alessandro Gavazza, Andrea Lanteri
Publication Date: October 2018
Date Revised: September 2020
Keyword(s): credit constraints, Durable goods
JEL(s): E21, E32, L62
Programme Areas: Industrial Organization, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13229

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: (i) indivisible durable goods are vertically differentiated in their quality and (ii) trade on secondary markets at market-clearing prices, with households endogenously choosing when to trade or scrap their durables. 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'').