Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets

73 Pages Posted: 17 Oct 2018 Last revised: 9 Mar 2020

See all articles by Alessandro Gavazza

Alessandro Gavazza

London School of Economics & Political Science (LSE) - London School of Economics

Andrea Lanteri

Duke University - Department of Economics

Date Written: February 2020

Abstract

This paper studies the 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: (1) different qualities of durable goods trade on secondary markets at market-clearing prices; and (2) households endogenously choose when to trade them or scrap them. The model 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, depressing 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 study the effects of collateral constraints and aggregate income shocks, and to evaluate targeted fiscal stimulus policies such as the Car Allowance Rebate System in 2009 (“Cash for Clunkers”).

Suggested Citation

Gavazza, Alessandro and Lanteri, Andrea, Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets (February 2020). Economic Research Initiatives at Duke (ERID) Working Paper 275, Available at SSRN: https://ssrn.com/abstract=3264345 or http://dx.doi.org/10.2139/ssrn.3264345

Alessandro Gavazza

London School of Economics & Political Science (LSE) - London School of Economics ( email )

United Kingdom

Andrea Lanteri (Contact Author)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

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