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Unemployment risk, precautionary saving, and durable goods purchase decisions


  • Wendy E. Dunn


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.

Suggested Citation

  • Wendy E. Dunn, 1998. "Unemployment risk, precautionary saving, and durable goods purchase decisions," Finance and Economics Discussion Series 1998-49, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:1998-49

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    References listed on IDEAS

    1. 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.
    2. Sichel, Daniel E, 1993. "Business Cycle Asymmetry: A Deeper Look," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 224-236, April.
    3. 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.
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    Cited by:

    1. Christopher D. Carroll & Karen E. Dynan & Spencer D. Krane, 2003. "Unemployment Risk and Precautionary Wealth: Evidence from Households' Balance Sheets," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 586-604, August.
    2. Volland, Benjamin, 2017. "The role of risk and trust attitudes in explaining residential energy demand: Evidence from the United Kingdom," Ecological Economics, Elsevier, vol. 132(C), pages 14-30.
    3. Saito, Makoto & Shiratsuka, Shigenori, 2003. "Precautionary Motives versus Waiting Options: Evidence from Aggregate Household Saving in Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(3), pages 1-20, October.
    4. Jose Luengo-Prado, Maria, 2006. "Durables, nondurables, down payments and consumption excesses," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1509-1539, October.
    5. repec:eee:touman:v:39:y:2013:i:c:p:37-49 is not listed on IDEAS
    6. David Berger & Joseph Vavra, 2015. "Consumption Dynamics During Recessions," Econometrica, Econometric Society, vol. 83, pages 101-154, January.

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    Consumer behavior ; Saving and investment;


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