Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets

Duke University, Durham NC

Investigators

Abstract

This project looks at one specific consumer durable, automobiles, and considers the role U.S. automobile markets played in the Great Recession. The PI and his research collaborator will use data on the price of both new and used cars. Previous work on the effects of macroeconomic changes on vehicle purchases has not fully considered how used vehicle purchases affect the market. This research incorporates the effects of used car markets on the macroeconomy in an innovative way. If a financial crisis makes it hard to borrow money, some lower-income households will choose to continue driving old vehicles rather than replacing their old automobiles with newer 'intermediate-age' used vehicles. This in turn means that demand for these intermediate used vehicles drops, and so the market value of used cars decreases. This decrease has a further effect on the market for new cars. Higher-income consumers now know they will get less from a trade-in of their current vehicle; in result, some of them delay new car purchases. The decrease in new car purchases has effects on the entire macroeconomy. The project will build a model of how these factors contributed to the Great Recession. The model can also be used to evaluate the macroeconomic effects of programs designed to stimulate demand for new cars. As a result, the research funded by this award will contribute to better U.S. economic policy and a stronger U.S. economy. The project studies the role of equilibrium dynamics in secondary markets for the behavior of purchases of new consumer durable goods in response to macroeconomic shocks. The specific focus is the effects of credit crises on car markets, and the research team will use a rich micro dataset on prices of new and used vehicles in the U.S. around the Great Recession with a quantitative general equilibrium model with heterogeneous households. The projects thus contributes to our understanding of linkages between the microeconomic decisions of heterogeneous households and observed aggregate dynamics via general equilibrium effects. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.