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Consumption Dynamics During Recessions

Publication ,  Journal Article
Berger, D; Vavra, J
Published in: Econometrica
January 1, 2015

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.

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Published In

Econometrica

DOI

EISSN

1468-0262

ISSN

0012-9682

Publication Date

January 1, 2015

Volume

83

Issue

1

Start / End Page

101 / 154

Related Subject Headings

  • Econometrics
  • 3803 Economic theory
  • 3802 Econometrics
  • 3801 Applied economics
  • 1403 Econometrics
  • 1402 Applied Economics
  • 1401 Economic Theory
 

Citation

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Berger, D., & Vavra, J. (2015). Consumption Dynamics During Recessions. Econometrica, 83(1), 101–154. https://doi.org/10.3982/ECTA11254
Berger, D., and J. Vavra. “Consumption Dynamics During Recessions.” Econometrica 83, no. 1 (January 1, 2015): 101–54. https://doi.org/10.3982/ECTA11254.
Berger D, Vavra J. Consumption Dynamics During Recessions. Econometrica. 2015 Jan 1;83(1):101–54.
Berger, D., and J. Vavra. “Consumption Dynamics During Recessions.” Econometrica, vol. 83, no. 1, Jan. 2015, pp. 101–54. Scopus, doi:10.3982/ECTA11254.
Berger D, Vavra J. Consumption Dynamics During Recessions. Econometrica. 2015 Jan 1;83(1):101–154.
Journal cover image

Published In

Econometrica

DOI

EISSN

1468-0262

ISSN

0012-9682

Publication Date

January 1, 2015

Volume

83

Issue

1

Start / End Page

101 / 154

Related Subject Headings

  • Econometrics
  • 3803 Economic theory
  • 3802 Econometrics
  • 3801 Applied economics
  • 1403 Econometrics
  • 1402 Applied Economics
  • 1401 Economic Theory