Kieran Larkin to publish in Econometrica
Kieran's paper "(S)Cars and the Great Recession" has recently been accepted for publication in one of the top 5 economics journals in the world.
The paper is about understanding the drivers of the Great Recession. They show how atypical patterns in car spending in the US during the recession can be informative about the underlying shocks hitting households. This is especially true once the impact across households at different points of the life cycle is considered. In particular, the cross-cohort spending patterns are consistent with a decline in how quickly younger households expected their income to grow during their career after the Great Recession hit.
How do you think your paper will influence future research in the area?
We make a useful distinction between the extensive (probability of purchase) and intensive margin (size/value conditional on purchase) of household car spending. We try to match what we see in the data with our model of the economy. These choices can be informative about different types of economic shocks, that in our context are faced by households. However, you could equally apply such a distinction to other “lumpy” choices such as housing or the investment decisions of firms. Hopefully future research will be able to use these two margins with new data to better understand the decision-making process of economic agents and what’s happening in the economy.
Where does the idea for this paper originate from?
This paper emerged from my PhD, when we observed an interesting feature of the data that the Great Recession was unusual in that people reduced spending on cars, conditional on the fact they chose to buy one. In US recessions prior to this, most of changes were on the choice of whether or not to purchase. This fact told us that we needed some new source of shocks to try and match these patterns. The rest of the work was trying to figures out what they were and how to put them in a realistic model.
What are the most important lessons policy makers can learn from your paper?
Interestingly, we end up attributing a fairly small role to the cost of car loans in explaining the patterns we see for car spending. Clearly, financial frictions are important for understanding the Great Recession (as the literature and my other work has shown) and we attribute a role for wealth shocks which captures this channel. Yet it is possible policy makers might want to weigh the importance of narrower credit supply causes a little lower. The paper also serves as a reminder of the usefulness of car spending as a leading indicator.
What can the general public learn from your paper?
I think the facts we establish go some way to clarifying why the Great Recession had such a persistent effect on the economy. At the time it can be unclear why a recession is more or less severe and why its impact lasts so long. Our paper provides the broader audience with an explanation.
How does it feel now that your paper is published?
It’s great to be able to complete a long running project and get some validation of its insights from one’s peers. The long lead and lag of the publication process means now it is onto the next project.
Are you continuing research in the same area or will you move on to completely different projects?
Yes. Much of my research is focused on understanding the consumption decisions of households and what they tell us about the economy. I’m currently looking at how consumption decisions during the Covid recession and recovery can be informative about different households’ expectations. This is useful for understanding the persistence of the shocks to the labor market and prices, and the amount of uncertainty households faced.
The paper has been co-written with Orazio Attanasio (Yale University), Morten O. Ravn (University College London), and Mario Padula (University of Venice).
Last updated: October 19, 2022
Source: Institute for International Economic Studies (IIES)