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Accelerator or Brake? Cash for Clunkers, Household Liquidity, and Aggregate Demand (WP-16-26)

Daniel Green, Brian Melzer, Jonathan Parker, and Arcenis Rojas

The researchers estimate the importance of household liquidity for the effect of the Car Allowance Rebate System (CARS) on vehicle transactions. They 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.

Daniel Green, PhD Candidate in Finance, Massachusetts Institute of Technology

Brian Melzer, Assistant Professor of Finance and IPR Associate, Northwestern University

Jonathan Parker, Robert C. Merton Professor of Finance, Massachusetts Institute of Technology

Arcenis Rojas, U.S. Bureau of Labor Statistics

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