tests for (S,s) bands behavior under uncertainty using data at the level of the individual household. Based on Grossman and Laroque (1990), her (S,s) model assumes that households adjust their stock of durables to a desired share of wealth. Once this level of durables to wealth stock is achieved, households allow it to depreciate until it reaches a critical lower bound level. At this point they purchase a new durable. She distinguishes between liquidity constrained and non-liquidity constrained households and focuses only on those households facing an adjustment cost. She finds strong evidence for the (S,s) type adjustment which she also expects to translate to the aggregate level. However, according to Foote et al. (2000), the (S,s) type adjustment model has very little to tell at the aggregate level, because any discrete adjustments will be smoothed out due to the presence of agent heterogeneity.

Like previous studies, Bertola et al. (2005) also attempt to derive aggregate implications from effects observed at the micro-level and indeed find that the negative effects of uncertainty on individual households translates into a negative aggregate effect. Specifically, they assess the effect of uncertainty on the frequency and size of adjustments for three different types of durable goods: vehicles, furniture, and jewelry. They show that small adjustment costs can imply wide ranges of inaction under uncertainty. Higher uncertainty widens the range of inaction and a more uncertain future leads to a lower probability of adjustment, but the adjustment is larger if it does occur. They find evidence that lump-sum adjustment costs are the predominant source of inaction in their dataset. Most of their results only hold for the vehicles, most likely because the other two categories are less subject to adjustment costs.

Other studies have instead focused on the impact of uncertainty on consumer behavior specifically during downturn periods. In a study closely related to this one, Romer (1990) looks for evidence of the uncertainty hypothesis in the 1930’s recession, using data for the United States. The paper assumes the existence of an inverse relationship between consumer spending on durable goods and uncertainty about future income. The paper also suggests that one should expect a positive wealth effect on non-durable goods: consumers who are not buying durable goods will have more wealth to spend on perishable goods. She establishes that uncertainty is a positive function of stock market volatility. On this basis, stock market volatility and consumer spending on durables should be negatively related. The choice of a stock market volatility measure as a proxy of uncertainty opens, however, the possibility for alternative explanations. Therefore, she also explores alternative sources of the nexus between stock market volatility and spending on durables, namely 1st order stock market adjustment and financial constraints. However, even controlling for those effects, the uncertainty hypothesis remains valid. Carroll and Dunn (1997) analyze the recession of 1990s that was characterized by a spontaneous decline in consumption, particularly in durables. The recession came after a period of strong build-up of household debt, in part driven by high spending on durable goods, which leads them to explore the link between uncertainty and balance sheet deterioration. They find that unemployment expectations influence spending beyond any information those expectations contain about future levels of income. When uncertainty increases consumers postpone durable purchases until balance sheet conditions improve.

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