DP16952 Idiosyncratic Income Risk and Aggregate Fluctuations
|Author(s):||Davide Debortoli, Jordi Galí|
|Publication Date:||January 2022|
|Keyword(s):||Economic Fluctuations, HANK models, Heterogeneous Agents, Idiosyncratic Shocks, monetary policy|
|JEL(s):||E21, E32, E50|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=16952|
We study the role of idiosyncratic income shocks for aggregate fluctuations within a simple heterogeneous household framework with no binding borrowing constraints. We show that the presence of idiosyncratic income shocks affects the economy's response to an aggregate shock in a way that can be captured by a consumption-weighted average of the changes in uncertainty generated by the shock. We apply this framework to two example economies ---an endowment economy and a New Keynesian economy--- and show that under plausible calibrations the impact of idiosyncratic income shocks on aggregate fluctuations is quantitatively small, since most of the changes in uncertainty are concentrated among poorer (low consumption) households.