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Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets
[“Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies”]

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  • Alessandro Gavazza
  • Andrea Lanteri

Abstract

This article 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: (1) indivisible durable goods are vertically differentiated in their quality and (2) 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”).

Suggested Citation

  • Alessandro Gavazza & Andrea Lanteri, 2021. "Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets [“Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies”]," Review of Economic Studies, Oxford University Press, vol. 88(6), pages 2935-2969.
  • Handle: RePEc:oup:restud:v:88:y:2021:i:6:p:2935-2969.
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    File URL: http://hdl.handle.net/10.1093/restud/rdab004
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    Cited by:

    1. Harmenberg, Karl & Öberg, Erik, 2021. "Consumption dynamics under time-varying unemployment risk," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 350-365.
    2. Boris Chafwehe, . "Unemployment Risk, Consumption Dynamics, and the Secondary Market for Durable Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    3. Keaton S. Miller & Wesley W. Wilson & Nicholas G. Wood, 2020. "Environmentalism, Stimulus, And Inequality Reduction Through Industrial Policy: Did Cash For Clunkers Achieve The Trifecta?," Economic Inquiry, Western Economic Association International, vol. 58(3), pages 1109-1128, July.
    4. Giuseppe Fiori & Filippo Scoccianti, 2021. "Aggregate dynamics and microeconomic heterogeneity: the role of vintage technology," Questioni di Economia e Finanza (Occasional Papers) 651, Bank of Italy, Economic Research and International Relations Area.
    5. Bill Dupor & Rong Li & M. Saif Mehkari & Yi-Chan Tsai, 2018. "The 2008 U.S. Auto Market Collapse," Working Papers 2018-19, Federal Reserve Bank of St. Louis.
    6. Francesca Vinci & Omar Licandro, 2020. "Switching-track after the Great Recession," Discussion Papers 2020/02, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    7. Hyunseung Oh, 2019. "The Role of Durables Replacement and Second‐Hand Markets in a Business‐Cycle Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(4), pages 761-786, June.
    8. Francesca Parodi, 2021. "Consumption Tax Cuts in a Recession," Carlo Alberto Notebooks 658, Collegio Carlo Alberto.

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    More about this item

    Keywords

    Credit constraints; Durable goods;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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