How Responsive are Durables Expenditures to Transitory Income Shocks?

We estimate how expenditures on durable goods respond to transitory income shocks using variation from the Economic Stimulus Act of 2008. The estimated responses are large: Households spent about 80 percent of their stimulus payment within three months of receiving the income transfer on durables alone. Most of this spending was on motor vehicles, either financed, used, or both, and about 20 percent of the total durables response was on smaller items. To purchase motor vehicles the average household levered up by 40 cents on the dollar using vehicle loans. Our findings suggest that durable goods and their financing are key to understanding the link between current income and spending.