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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9035.
Date of creation: Jul 2012
Date of revision:
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Other versions of this item:
- Enzo A. Cerletti & Josep Pijoan-Mas, 2012. "Durable Goods, Borrowing Constraints And Consumption Insurance," Working Papers wp2012_1206, CEMFI.
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-23 (All new papers)
- NEP-DGE-2012-07-23 (Dynamic General Equilibrium)
- NEP-IAS-2012-07-23 (Insurance Economics)
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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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