Consumption Dynamics During Recessions

• DOI: 10.3982/ecta11254
• Publication Date: 2015-02-18T02:20:22Z
• Authors: David Berger; Joseph Vavra
• Keywords: 8. Economic growth; 1. No poverty

When will durable expenditures respond strongly to economic stimulus? We build from micro evidence and show that in a heterogeneous agent business cycle model with …xed costs of durable adjustment, responsiveness is substantially dampened during recessions. Our model estimates imply that during the Great Recession, durable expenditures were half as responsive to additional stimulus as during the boom in the 1990s. This procyclical responsiveness is driven by changes in the distribution of households’desired durable holdings over the cycle. We directly test our model by estimating this distribution empirically using PSID micro data and …nd that the distribution in the data moves cyclically as predicted. In addition to this micro evidence, we also provide support for our model’s procyclical responsiveness using aggregate time-series data, and we show this time-series evidence is inconsistent with simpler models featuring smooth adjustment costs.