Durable Goods, Borrowing Constraints, and Consumption Insurance


We study the different transmission of income shocks into consumption goods of different durability. We show that binding borrowing constraints lead to a substitution between goods upon arrival of an unexpected income change. The sign of this substitution depends critically on the persistence of the shock, whereas its size depends on the durability of goods and on their role as collateral for borrowing. An important consequence is that the response of nondurable consumption to income shocks is an imperfect measure of household insurance against labor market risk. We use a life-cycle model with labor market uncertainty and incomplete markets to quantify the actual amount of insurance implied by the observed transmission of income shocks to nondurable consumption. We find that young households have substantially less insurance against transitory shocks and more insurance against permanent shocks than implied by the transmission of the shocks into nondurable consumption expenditure.

Información adicional

  • Presentador: Enzo A. Cerletti
  • Proveniente: Goethe University Frankfurt
  • Fecha: Miércoles, 15 Noviembre 2017
  • Hora: 12 hs
  • Lugar: Sala R1, Edificio Recicla, FAE