The Role of Durables Replacement and Second-Hand Markets in a Business-Cycle Model

Abstract

Transactions of used durables are large and cyclical, but their interaction with purchases of new durables has been neglected in business-cycle studies. I fill in this gap by introducing a new business-cycle model of durables where households resell their goods to the second-hand market and the production of new durables is affected by the supply of used goods. The model delivers three conclusions: markups are smaller for goods that are more durable and more frequently replaced; markups are countercyclical for durables, resolving the comovement puzzle of Barsky et al. (2007); and procyclical replacement demand amplifies durable spending.

Keywords: Durables, Business cycles, Countercyclical markup, Second-hand markets

JEL Classification: E20, E30, E32