Cars and the Great Recession

We use household consumer choices to inform about the shocks that households perceived affecting their current and future economic opportunities during the Great Recession. We use the Consumer Expenditure Survey to derive cohort and business cycle decompositions of consumption profiles. When decomposing the car expenditure data into an extensive and an intensive margin, we find that the intensive margin contracted sharply, a finding in stark contrast to conventional wisdom. We interpret the evidence through the prism of a very rich life-cycle model where individuals are subject to idiosyncratic uninsurable income shocks, aggregate income shocks, wealth shocks, and credit shocks. Cars are large and costly to transact. This implies an (S,s) type of behaviour. We show that, because of their salience and the transaction costs, cars are particularly sensitive to changes in the perception of future expected in come and its variability. We find that life-cycle profile shocks and wealth shocks are important determinants of consumption choices during the Great Recession.