Consumption Dynamics During Recessions

David Berger, Joseph Vavra

Research output: Contribution to journalArticlepeer-review

28 Scopus citations

Abstract

Are there times when durable spending is less responsive to economic stimulus? We argue that aggregate durable expenditures respond more sluggishly to economic shocks during recessions because microeconomic frictions lead to declines in the frequency of households' durable adjustment. We show this by first using indirect inference to estimate a heterogeneous agent incomplete markets model with fixed costs of durable adjustment to match consumption dynamics in PSID microdata. We then show that aggregating this model delivers an extremely procyclical Impulse Response Function (IRF) of durable spending to aggregate shocks. For example, the response of durable spending to an income shock in 1999 is estimated to be almost twice as large as if it occurred in 2009. This procyclical IRF holds in response to standard business cycle shocks as well as in response to various policy shocks, and it is robust to general equilibrium. After estimating this robust theoretical implication of micro frictions, we provide additional direct empirical evidence for its importance using both cross-sectional and time-series data.

Original languageEnglish (US)
Pages (from-to)101-154
Number of pages54
JournalEconometrica
Volume83
Issue number1
DOIs
StatePublished - Jan 1 2015

Keywords

  • Consumption
  • Durables
  • Fixed costs
  • Indirect inference
  • Nonlinear impulse response

ASJC Scopus subject areas

  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Consumption Dynamics During Recessions'. Together they form a unique fingerprint.

Cite this