The Dynamics of Car Sales: A Discrete Choice Approach

Abstract

This paper studies the joint dynamics of aggregate car sales, prices and income.We analyze theses series using a dynamic discrete choice model which is consistent with microeconomic evidence on the infrequency of durable purchases.We estimate the parameters of this choice problem at the household level.Through aggregation we show that the model can reproduce the dynamics of demand captured by an ARMA model, as in Mankiw (1982), and the joint dynamics summarized through a VAR representation of car sales, income and prices.We find that most of the variation in car sales is due to shocks which influence the replacement probability rather than the cross sectional distribution of car vintages.

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