Do consumption categories respond differently to indebtedness shocks across business cycle stages?

Abstract

This paper investigates how household consumption of durable goods, nondurable goods, and services responds to unexpected changes in indebtedness within a threshold vector-autoregression (TVAR) framework. Two regimes emerge: good times, when the lagged output gap exceeds a data-driven threshold, and bad times, when it falls below. A positive indebtedness shock raises consumption of nondurable goods and services, with the effect strongest in bad times. By contrast, durable-goods spending declines in the bad-times regime. These findings imply that North American households rely on additional borrowing to smooth everyday expenditures, but cut back on big-ticket purchases when macroeconomic conditions deteriorate, even if they remain optimistic about future income.