Trading Down and the Business Cycle

60 Pages Posted: 8 Sep 2015

See all articles by Nir Jaimovich

Nir Jaimovich

University of Zurich

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Arlene Wong

Northwestern University - Department of Economics

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Date Written: September 2015

Abstract

We document two facts. First, during the Great Recession, consumers traded down in the quality of the goods and services they consumed. Second, the production of low-quality goods is less labor intensive than that of high-quality goods. When households traded down, labor demand fell, increasing the severity of the recession. We find that the trading-down phenomenon accounts for a substantial fraction of the fall in U.S. employment in the recent recession. We show that embedding quality choice in a business-cycle model improves the model's amplification and comovement properties.

Suggested Citation

Jaimovich, Nir and Tavares Rebelo, Sergio and Wong, Arlene, Trading Down and the Business Cycle (September 2015). NBER Working Paper No. w21539. Available at SSRN: https://ssrn.com/abstract=2656941

Nir Jaimovich (Contact Author)

University of Zurich ( email )

Sergio Tavares Rebelo

Northwestern University - Kellogg School of Management ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Arlene Wong

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

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