Working Paper: CEPR ID: DP16952
Authors: Davide Debortoli; Jordi Gal
Abstract: 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.
Keywords: Heterogeneous agents; Economic fluctuations; Idiosyncratic shocks; Monetary policy; HANK models
JEL Codes: E21; E32; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| idiosyncratic income shocks (D89) | economy's response to aggregate shocks (E13) |
| increase in average consumption uncertainty (D11) | reduced aggregate consumption (E21) |
| distribution of changes in uncertainty among households (D89) | overall impact on aggregate consumption (E20) |
| idiosyncratic risk (D81) | aggregate fluctuations (E10) |