Durable Goods, Borrowing Constraints And Consumption Insurance
AbstractIn this paper we study the transmission of income shocks into nondurable consumption in the presence of durable goods. We use a standard a life-cycle model with two goods to characterize the interaction of durability of goods, durability of shocks, and borrowing constraints as determinants of shock transmission. We show that borrowing constraints lead to a substitution between durable and non-durable goods upon arrival of an unexpected income change. This substitution biases the conventional measures of insurance based on the response of non-durable consumption to income changes. The sign of this bias depends critically on the persistence of the shock. We show that households have less insurance against transitory shocks and more insurance against permanent shocks than commonly measured. We calibrate the model economy to the US in order to measure the size of this bias.
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Bibliographic InfoPaper provided by CEMFI in its series Working Papers with number wp2012_1206.
Date of creation: May 2012
Date of revision:
Consumption insurance; durable goods; incomplete markets; borrowing constraints; persistence of income shocks.;
Other versions of this item:
- Cerletti, Enzo & Pijoan-Mas, Josep, 2012. "Durable Goods, Borrowing Constraints and Consumption Insurance," CEPR Discussion Papers 9035, C.E.P.R. Discussion Papers.
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-01 (All new papers)
- NEP-DGE-2012-07-01 (Dynamic General Equilibrium)
- NEP-IAS-2012-07-01 (Insurance Economics)
- NEP-MAC-2012-07-01 (Macroeconomics)
You can help add them by filling out this form.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Durable goods, borrowing constraints and consumption insurance
by Christian Zimmermann in NEP-DGE blog on 2012-07-01 22:19:51
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