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Durable Expenditure Dynamics under Time-Varying Income Risk

Author

Listed:
  • Erik Öberg

    (Stockholm University)

  • Karl Harmenberg

    (IIES - Stockholm University)

Abstract
We explore the relationship between fluctuations in income risk and expenditures on durable goods. First, we study the effect of fluctuations in income risk in a tractable partial equilibrium model of durable expenditure decisions featuring non-convex adjustment costs. Non-convex adjustment costs imply that households follow an Ss-type decision rule. In this setting, temporary increases in income risk raise the option value of postponing purchases. With a mean-preserving income process calibrated to match the US business cycle swings in income risk, the fall in durable expenditures upon entering a recession is three times as large as in the same model without adjustment costs. Second, we investigate the relationship empirically. Using micro level data from the Italian Household Survey of Income and Wealth, we estimate the effect of fluctuations in unemployment risk on durable and non-durable expenditures. We find that durables respond strongly to an increase in unemployment risk, while the effect is negligible and statistically insignificant for non-durable expenditures. We also provide evidence using US time series data.

Suggested Citation

  • Erik Öberg & Karl Harmenberg, 2016. "Durable Expenditure Dynamics under Time-Varying Income Risk," 2016 Meeting Papers 672, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:672
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    References listed on IDEAS

    as
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    Cited by:

    1. Krueger, D. & Mitman, K. & Perri, F., 2016. "Macroeconomics and Household Heterogeneity," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 843-921, Elsevier.
    2. Harmenberg, Karl, 2021. "Aggregating heterogeneous-agent models with permanent income shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 129(C).
    3. Boris Chafwehe, 2023. "Unemployment Risk, Consumption Dynamics, and the Secondary Market for Durable Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 202-243, April.
    4. Kim, Seonghoon & Wang, Lanjie, 2024. "Navigating Unemployment without Unemployment Insurance: Evidence from Singapore," IZA Discussion Papers 17299, Institute of Labor Economics (IZA).
    5. Marius Clemens & Werner Röger, 2022. "Durable Consumption, Limited VAT Pass-Through and Stabilization Effects of Temporary VAT Changes," Discussion Papers of DIW Berlin 2004, DIW Berlin, German Institute for Economic Research.
    6. Javier Gardeazabal & Eduardo Polo-Muro, 2022. "Cultural expenditure of those who enter (or exit) unemployment," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 46(4), pages 571-596, December.
    7. Jin Cao & Chao Cui & Valeriya Dinger & Martin B. Holm & Shulong Kang, 2022. "Identifying the depreciation rate of durables from marginal spending responses," Working Paper 2022/1, Norges Bank.
    8. Tao Wang, 2023. "Perceived versus Calibrated Income Risks in Heterogeneous-Agent Consumption Models," Staff Working Papers 23-59, Bank of Canada.
    9. Jeppe Druedahl, 2021. "A Guide on Solving Non-convex Consumption-Saving Models," Computational Economics, Springer;Society for Computational Economics, vol. 58(3), pages 747-775, October.
    10. Juelsrud, Ragnar E. & Wold, Ella Getz, 2019. "The Saving and Employment Effects of Higher Job Loss Risk," Working Paper 2019/17, Norges Bank.

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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