Household balance sheets, buffer-stock saving behavior and durable goods

This dissertation addresses the implications of buffer-stock saving behavior for purchases of durable goods. In the theoretical model(s), consumers save not only to finance the down payment on a durable good, but also to offset risks to their income, particularly the risk of unemployment. This leads to several interesting implications for consumption behavior-most importantly, that the timing of durable goods purchase decisions depends on both the anticipated risk of unemployment and the level of liquid assets held by consumers. Consumers respond to an increase in uncertainty by reducing their consumption of nondurables and postponing purchases of durable goods in order to accumulate additional precautionary savings and improve their balance sheet conditions. These spending cuts occur because higher unemployment risk raises the consumer's target buffer-stock of liquid assets, or, put another way, raises the marginal utility of liquid wealth.;The theory is capable of explaining several empirical regularities that are unexplained by standard life cycle/permanent income models. The model correctly predicts that unemployment expectations contain substantial explanatory power for the growth rate of aggregate consumption of both nondurables and durables, even after controlling for information they contain about future income growth. Analyses of microeconomic data indicate that households with high unemployment risk are less likely to have recently purchased homes or cars. A prediction that the consumption decisions of older consumers are relatively less sensitive to unemployment risk is also validated. Both liquid assets and home equity are shown to have significant effects on the household's decision to purchase a home, and not simply because they are needed to finance fixed transactions costs.;These results are important because they provide insight into the reasons for the observed cyclical behavior of aggregate household spending, in particular the volatility of durable goods purchases over the business cycle. Furthermore, the theory offers a rigorous potential explanation for why balance sheet conditions should have an effect on consumers' spending decisions. By demonstrating that precautionary saving motives have significant implications for purchases of durable goods as well as nondurables, the dissertation also extends the relevance of existing work on precautionary saving.