Keywords: Precautionary saving, income uncertainty, durable goods
Abstract: In this paper household level data are used to explore whether unemployment risk is an important factor in the timing
of consumers' durable goods purchase decisions. A theoretical model is presented in which both income uncertainty and household
debt play a direct role, offering a potential explanation for fluctuations in durable goods spending over the business cycle.
The model predicts that consumers respond to increases in unemployment risk by postponing purchases of the durable good and
reducing their spending on nondurable goods in order to bolster their precautionary buffer-stock of liquid assets. Consistent
with the model, there is evidence that unemployment risk has a direct effect on the timing of home purchases: households with a
higher probability of becoming unemployed are less likely to have recently purchased a home or a car, even after controlling for
demographic variables. A prediction that the consumption decisions of older consumers are relatively less sensitive to
unemployment risk is also validated. Another finding consistent with the theoretical model is that consumers who are observed
to have bought a house despite facing high unemployment risk tend to have more liquid assets left over than homebuyers who face
ordinary or low unemployment risks.
Full paper (335 KB PDF)
| Full paper (505 KB Postscript)
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