Trading Down and the Business Cycle

52 Pages Posted: 30 Nov 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

Multiple version iconThere are 3 versions of this paper

Date Written: 2015-11-01

Abstract

The authors 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. Therefore, when households trade down, labor demand falls, increasing the severity of recessions. The authors find that the trading-down phenomenon accounts for a substantial fraction of the fall in U.S. employment in the recent recession. They 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.

Keywords: recessions, quality choice, business cycles

JEL Classification: E2, E3, E4

Suggested Citation

Jaimovich, Nir and Tavares Rebelo, Sergio and Wong, Arlene, Trading Down and the Business Cycle (2015-11-01). FRB Atlanta CQER Working Paper No. 2015-5. Available at SSRN: https://ssrn.com/abstract=2695685

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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