Erik Öberg, Stockholm University
"Consumption Dynamics under Time-varying Unemployment Risk"
We argue that adjustment frictions for durable goods generate a powerful amplification channel from fluctuations in unemployment risk to aggregate consumption demand.
First, we use Italian household survey data to document that durable expenditures react strongly to increased unemployment risk (with a semi-elasticity of around 3), while the effect on nondurable expenditures is indistinguishable from zero. Second, we propose and calibrate a buffer-stock savings model that includes adjustment frictions for durable goods. Households optimally employ an (S, s)-type decision rule, in which the value of postponing purchases of durables increases if unemployment risk is temporarily high. Although not targeted in the calibration, we find that the model reproduces the semi-elasticities of expenditures to unemployment risk estimated in the data.
Using the model, we find that the inclusion of adjustment frictions raises the aggregate demand response for durable goods to fluctuations in perceived unemployment risk by approximately 250 percent. Moreover, upon experiencing an adverse risk shock, the same frictions dampen the responsiveness of aggregate demand for durable goods to the interest rate and transitory income shocks, constraining monetary and fiscal transfer policies in stabilizing consumption in recessions.