Consumption Dynamics During Recessions

75 Pages Posted: 2 Jun 2014

See all articles by David Berger

David Berger

Northwestern University

Joseph Vavra

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: May 2014

Abstract

Are there times when durable spending is less responsive to economic stimulus? We argue that aggregate durable expenditures respond more sluggishly to economic shocks during recessions because microeconomic frictions lead to declines in the frequency of households' durable adjustment. We show this by first using indirect inference to estimate a heterogeneous agent incomplete markets model with fixed costs of durable adjustment to match consumption dynamics in PSID microdata. We then show that aggregating this model delivers an extremely procyclical Impulse Response Function (IRF) of durable spending to aggregate shocks. For example, the response of durable spending to an income shock in 1999 is estimated to be almost twice as large as if it occurred in 2009. This procyclical IRF holds in response to standard business cycle shocks as well as in response to various policy shocks, and it is robust to general equilibrium. After estimating this robust theoretical implication of micro frictions, we provide additional direct empirical evidence for its importance using both cross-sectional patterns in PSID data as well as time-series patterns from aggregate durable spending.

Suggested Citation

Berger, David and Vavra, Joseph, Consumption Dynamics During Recessions (May 2014). NBER Working Paper No. w20175. Available at SSRN: https://ssrn.com/abstract=2444562

David Berger (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Joseph Vavra

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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