Unemployment risk, precautionary saving, and durable goods purchase decisions
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.
|Date of creation:||1998|
|Date of revision:|
|Contact details of provider:|| Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551|
Web page: http://www.federalreserve.gov/
More information through EDIRC
|Order Information:||Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- R. Glenn Hubbard & Jonathan Skinner & Stephen P. Zeldes, 1993.
"The Importance of Precautionary Motives in Explaining Individual and Aggregate Saving,"
NBER Working Papers
4516, National Bureau of Economic Research, Inc.
- Hubbard, R. Glenn & Skinner, Jonathan & Zeldes, Stephen P., 1994. "The importance of precautionary motives in explaining individual and aggregate saving," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 59-125, June.
- Sichel, D.E., 1988.
"Business Cycle Asymmetry: A Deeper Look,"
85, Princeton, Department of Economics - Financial Research Center.
- Christopher D. Carroll, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 1-55.
When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:1998-49. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marlene Vikor)
If references are entirely missing, you can add them using this form.