DP15614 Household Savings and Monetary Policy under Individual and Aggregate Stochastic Volatility

Author(s): Yuriy Gorodnichenko, Lilia Maliar, Serguei Maliar, Christopher Naubert
Publication Date: February 2021
Keyword(s): deep learning, HANK, Heterogeneous Agents, Machine Learning, neural network
JEL(s):
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15614

In this paper, we study household consumption-saving and portfolio choices in a heterogeneous-agent economy with sticky prices and time-varying total factor productivity and idiosyncratic stochastic volatility. Agents can save through liquid bonds and illiquid capital and shares. With rich heterogeneity at the household level, we are able to quantify the impact of uncertainty across the income and wealth distribution. Our results help us in identifying who wins and who loses when during periods of heightened individual and aggregate uncertainty. To study the importance of heterogeneity in understanding the transmission of economic shocks, we use a deep learning algorithm. Our method preserves non-linearities, which is essential for understanding the pricing decisions for illiquid assets.