Unemployment Expectations, Jumping (S,S) Triggers, and Household Balance Sheets

54 Pages Posted: 11 Jun 2000 Last revised: 6 Oct 2010

See all articles by Christopher D. Carroll

Christopher D. Carroll

Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER)

Wendy E. Dunn

Board of Governors of the Federal Reserve - Household and Business Spending Section; Johns Hopkins University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 1997

Abstract

This paper examines the relationship between household balance sheets, consumer purchases, and expectations. We find few 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.

Suggested Citation

Carroll, Christopher D. and Dunn, Wendy E., Unemployment Expectations, Jumping (S,S) Triggers, and Household Balance Sheets (July 1997). NBER Working Paper No. w6081, Available at SSRN: https://ssrn.com/abstract=226488

Christopher D. Carroll (Contact Author)

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Wendy E. Dunn

Board of Governors of the Federal Reserve - Household and Business Spending Section ( email )

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Washington, DC 20551
United States

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

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