Abstract
This paper studies 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: (i) indivisible durable goods are vertically differentiated in their quality and (ii) trade on secondary markets at market-clearing prices, with households endogenously choosing when to trade or scrap their durables. The model highlights a new transmission mechanism for macroeconomic shocks and 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, which depresses 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 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
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
