Accelerator or Brake? Cash for Clunkers, Household Liquidity, and Aggregate Demand

Daniel Green, Brian T. Melzer, Jonathan A. Parker, Arcenis Rojas

NBER Working Paper No. 22878
Issued in December 2016
NBER Program(s):Asset Pricing, Corporate Finance, Economic Fluctuations and Growth, Monetary Economics, Public Economics

We estimate the importance of household liquidity for the effect of the Car Allowance Rebate System (CARS) on vehicle transactions. We measure the average program impact by comparing households with "clunkers" eligible for CARS to households with similar vehicles that were ineligible. The liquidity provided by CARS contributed to its larger than anticipated take-up. Clunkers with existing loans, which required immediate repayment upon trade-in, were traded-in at much lower rates, an effect consistent with liquidity constraints and distinguishable from that of other debt, household income, and the size of the program subsidy. Household debt capacity did not measurably constrain participation.

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Document Object Identifier (DOI): 10.3386/w22878

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