Consumption dynamics under time-varying unemployment risk

•Aggregate spending on durable goods responds strongly to increased unemployment risk.•Aggregate spending on nondurable goods responds strongly to unemployment spells.•When households hold little liquid assets, the durable-spending response is dampened.•Reduced-form empirical evidence supports the model predictions. In response to an adverse labor-market shock, a calibrated heterogeneous-agent model predicts that aggregate spending on durable goods falls mainly due to the ex-ante increase in income uncertainty caused by higher unemployment risk. In contrast, aggregate spending on nondurable goods falls mainly due to the ex-post income losses associated with realized unemployment spells. When households hold little liquid assets, the nondurable spending response is amplified, whereas the durable spending response is dampened. These differences stem from micro-level adjustment frictions involved in purchases of durable goods. The model is corroborated with evidence from micro survey data.