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).
Highlights
Expenditures on consumer durable goods are a large, highly volatile, and procyclical component of Gross Domestic Product (GDP)
A distinctive feature of our model is the endogenous illiquidity of durable goods, which implies that the volume of trade in secondary markets and used-car prices drop as credit constraints tighten
We propose a novel general-equilibrium model of endogenous illiquidity of consumer durable goods to account for the aggregate dynamics of durable expenditures
Summary
Expenditures on consumer durable goods are a large, highly volatile, and procyclical component of Gross Domestic Product (GDP). Most notably, (1) vehicle scrappage declined from 2007 to 2009; (2) the cost of replacing a used car with a new one increased from 2007 to 2009, as used-car prices dropped and new-car prices remained stable; and (3) the fraction of households that replaced a used vehicle with a new one bottomed out during the Great Recession These facts motivate us to develop a macroeconomic model of durable consumption that features a notion of endogenous illiquidity, stemming from equilibrium dynamics in secondary markets. Secondary markets play the fundamental role of reallocating used cars from higher-income households to lower-income ones In this setting, we consider a shock that permanently tightens credit limits, as in other recent papers that propose this shock as a plausible exogenous source of macroeconomic dynamics consistent with the experience of the Great Recession
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