Stimulating Durable Purchases (with Berger, Turner, Zwick)

Joint with David Berger, Nicholas Turner and Eric Zwick

Abstract This paper uses a benchmark life-cycle model with incomplete markets and durable consumption as a laboratory to investigate the design of fiscal stimulus. We calibrate the model to match microdata moments from standard sources, administrative data on homeownership transitions, and quasi-experimental estimates from the First-Time Homebuyer Credit in the U.S. We present three results. First, frictions that limit agents' ability to smooth durable purchases over time are crucial to reconciling competing empirical findings. With liquidity constraints and fixed adjustment costs, the standard real-business-cycle intuition that responses should quickly reverse no longer holds. A first-time homebuying subsidy that can be applied to the down payment induces a response that persists over many years. This persistence arises because the subsidy enables young, constrained agents to transition to homeownership several years earlier than they otherwise would have and because homes are a better store of value than other durables. Second, whereas in standard models the marginal propensity to consume (MPC) out of cash transfers declines rapidly with the size of a cash transfer, we find a much slower decline in our baseline model, with durable goods adjustments driving the result. Finally, we combine the model with techniques from the public finance literature to assess welfare implications of alternative durable stimulus and cash transfers. Large fiscal or welfare spillovers are necessary for targeted durable subsidies to match the benefits of unconditional cash transfers.


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