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Unemployment Expectations Jumping (Ss) Triggers and Household Balance Sheets

  • Christopher D Carroll
  • Wendy E Dunn

This paper examines the relationship between household balance sheets consumer purchases and expectations We find robust empirical relationships between balance sheet measures and spending but we do find that unemployment expectations are robustly correlated with spending We then construct a formal model of durables and nondurables consumption with an explicit role for unemployment and for household debt We find that the model is capable of explaining several empirical regularities which are at best unexplained by standard models Finally we show that a loosening of liquidity constraints can produce a runup in debt similar to that experienced recently in the US and that after such a liberalization consumer purchases show heightened sensitivity to labor income uncertainty providing a potential rigorous interpretation of the widespread view that the buildup of debt in the 1980s may have played an important role in the weakness of consumption during and after the 1990 recession

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Paper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number 386.

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Date of creation: May 1997
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Handle: RePEc:jhu:papers:386
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  1. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September.
  2. Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994. "Does Consumer Sentiment Forecast Household Spending? If So, Why?," American Economic Review, American Economic Association, vol. 84(5), pages 1397-1408, December.
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