Consumption Dynamics under Time-Varying Unemployment Risk

Karl Harmenberg, Erik Öberg*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

In response to an adverse labor-market shock, a calibrated heterogeneous-agent model predicts that aggregate spending on durable goods falls mainly due to the ex-ante increase in income uncertainty caused by higher unemployment risk. In contrast, aggregate spending on nondurable goods falls mainly due to the ex-post income losses associated with realized unemployment spells. When households hold little liquid assets, the nondurable spending response is amplified, whereas the durable spending response is dampened. These differences stem from micro-level adjustment frictions involved in purchases of durable goods. The model is corroborated with evidence from micro survey data.
Original languageEnglish
JournalJournal of Monetary Economics
Volume118
Pages (from-to)350-365
Number of pages16
ISSN0167-2231
DOIs
Publication statusPublished - Mar 2021

Bibliographical note

Published online: 25. November 2020

Keywords

  • Consumption
  • Durables
  • Precautionary savings
  • Wait-and-see effect
  • Real options
  • Adjustment costs

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