Consumption dynamics under time-varying unemployment risk

Karl Harmenberg and Erik Öberg

Journal of Monetary Economics, 2021, vol. 118, issue C, 350-365

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.

Keywords: Consumption; Durables; Precautionary savings; Wait-and-see effect; Real options; Adjustment costs (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (8)

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Working Paper: Consumption Dynamics under Time-Varying Unemployment Risk (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:118:y:2021:i:c:p:350-365

DOI: 10.1016/j.jmoneco.2020.10.004

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