Consumption Dynamics under Time- Varying Unemployment Risk

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Consumption Dynamics under Time- Varying Unemployment Risk

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Title: Consumption Dynamics under Time- Varying Unemployment Risk
Author: Harmenberg, Karl; Öberg, Erik
Abstract: Private consumption demand falls in response to increased unemployment risk during a recession, as households increase their precautionary savings and postpone irreversible durable investments. The postponement e ect is seven times as large as the precautionary-savings e ect in a calibrated bu er- stock savings model. In consequence, anticipation of future unemployment risk is more important than realized unemployment shocks in accounting for durable expenditure dynamics during recessions, while the opposite is true for nondurables. The importance of anticipation of future unemployment risk also means that having many 'hand-to-mouth' households, who do not respond to changes in income risk, signi cantly dampens the demand response for durables to an adverse labor market shock. We nd that the model elasticities of durable and nondurable expenditures with respect to unemployment risk are close to what we estimate in micro survey data.
URI: http://hdl.handle.net/10398/9748
Date: 2019-08-05

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