On the cyclicality of durable consumption responses

Building on canonical asset pricing and portfolio choice frameworks with illiquid durable goods (Grossman and Laroque (1990), Flavin and Nakagawa (2008), Stokey (2009)), I propose a heterogeneous agent portfolio choice model to assess the cyclicality of aggregate durable consumption responses. The model features idiosyncratic utility switching costs that allow it to match the distribution of durable adjustments sizes in PSID data. By leveraging a structural mapping between adjustment hazards and the cross-sectional distribution of wealth, the framework provides a robust method for estimating fundamental adjustment frictions directly from observed behavior. We find that the model predicts procyclical and non-linear durable demand responses and a disproportionate decline in upward adjustments during recessions. The main result demonstrates that policy, such as fiscal stimulus payments, is significantly more potent during economic booms than in recessions. This asymmetry highlights the state-dependent nature of stabilization policies and their varying effectiveness across the business cycle.