Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets

Abstract This article studies equilibrium dynamics in consumer durable goods markets after aggregate credit shocks. We introduce two novel features into a general-equilibrium model of consumption with heterogeneous households facing idiosyncratic income risk and borrowing constraints: (1) indivisible are vertically differentiated their quality (2) trade on secondary at market-clearing prices, endogenously choosing when to or scrap durables. The highlights new transmission mechanism for macroeconomic shocks successfully matches several empirical patterns that we document using data U.S. car around the Great Recession. After tightening limit, debt-constrained postpone decision upgrade low-quality cars, which depresses mid-quality prices. In turn, this effect reduces wealthy households’ incentives replace cars high-quality ones, thereby decreasing new-car sales. further use our framework evaluate targeted fiscal stimulus policies such as Car Allowance Rebate System 2009 (“Cash Clunkers”).