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Trading Down and the Business Cycle

Author

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  • Jaimovich, Nir
  • Rebelo, Sérgio
  • Wong, Arlene

Abstract

We document two facts. First, during recessions consumers trade down in the quality of the goods and services they consume. Second, the production of low-quality goods is less labor intensive than that of high-quality goods. So, when households trade down, labor demand falls, increasing the severity of recessions. We find that the trading-down phenomenon accounts for a substantial fraction of the fall in U.S. employment in the recent recession. We study two business cycle models that embed quality choice and find that the presence of quality choice magnifies the response of these economies to real and monetary shocks.

Suggested Citation

  • Jaimovich, Nir & Rebelo, Sérgio & Wong, Arlene, 2015. "Trading Down and the Business Cycle," CEPR Discussion Papers 10807, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10807
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    References listed on IDEAS

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    1. Lawrence J. Christiano & Terry J. Fitzgerald, 1998. "The business cycle: it's still a puzzle," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 56-83.
    2. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
    3. Aviv Nevo & Arlene Wong, 2015. "The Elasticity of Substitution Between Time and Market Goods: Evidence from the Great Recession," NBER Working Papers 21318, National Bureau of Economic Research, Inc.
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    5. Greg Kaplan & Guido Menzio, 2016. "Shopping Externalities and Self-Fulfilling Unemployment Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 124(3), pages 771-825.
    6. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1, June.
    7. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1415-1464.
    8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    9. Yuriy Gorodnichenko & Michael Weber, 2016. "Are Sticky Prices Costly? Evidence from the Stock Market," American Economic Review, American Economic Association, vol. 106(1), pages 165-199, January.
    10. repec:pri:cepsud:234kaplan is not listed on IDEAS
    11. Mark Aguiar & Erik Hurst & Loukas Karabarbounis, 2013. "Time Use during the Great Recession," American Economic Review, American Economic Association, vol. 103(5), pages 1664-1696, August.
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    Citations

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    Cited by:

    1. Chen, Natalie & Juvenal, Luciana, 2018. "Quality and the Great Trade Collapse," Journal of Development Economics, Elsevier, vol. 135(C), pages 59-76.
    2. Julien Prat & Boyan Jovanovic, 2015. "Reputation Cycles," 2015 Meeting Papers 971, Society for Economic Dynamics.
    3. Eric Anderson & Sergio Rebelo & Arlene Wong, 2018. "Markups Across Space and Time," NBER Working Papers 24434, National Bureau of Economic Research, Inc.
    4. Javier Cravino & Andrei A. Levchenko, 2017. "The Distributional Consequences of Large Devaluations," American Economic Review, American Economic Association, vol. 107(11), pages 3477-3509, November.
    5. Claudio Michelacci & Andrea Pozzi & Luigi Paciello, 2018. "The extensive margin of aggregate consumption demand," 2018 Meeting Papers 1008, Society for Economic Dynamics.
    6. Stuart Gabriel & Owen Hearey & Matthew E. Kahn & Ryan K. Vaughn, 2016. "Public School Quality Valuation Over the Business Cycle," NBER Working Papers 22668, National Bureau of Economic Research, Inc.
    7. Laurien Gilbert, 2018. "Gains from Product Variety and the Local Business Cycle," 2018 Meeting Papers 46, Society for Economic Dynamics.
    8. Carlos Santos & Luis F. Costa & Paulo Brito, 2016. "Demand, Supply and Markup Fluctuations," FEUNL Working Paper Series wp609, Universidade Nova de Lisboa, Faculdade de Economia.
    9. Adam Gorajek, 2018. "Econometric Perspectives on Economic Measurement," RBA Research Discussion Papers rdp2018-08, Reserve Bank of Australia.
    10. Kirill Borusyak & Xavier Jaravel, 2018. "The Distributional Effects of Trade: Theory and Evidence from the United States," 2018 Meeting Papers 284, Society for Economic Dynamics.
    11. Nir Jaimovich, 2015. "The Research Agenda: Nir Jaimovich on The changing nature of business cycles," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 16(2), November.

    More about this item

    Keywords

    business cycle; quality choice; recessions;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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