Working Paper: NBER ID: w29704
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: idiosyncratic income risk; aggregate fluctuations; household heterogeneity; New Keynesian models
JEL Codes: E21; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| idiosyncratic income shocks (D89) | aggregate consumption fluctuations (E20) |
| uncertainty shifter (D89) | aggregate consumption fluctuations (E20) |
| aggregate shock (E10) | average consumption uncertainty (D89) |
| average consumption uncertainty (D89) | aggregate consumption (E20) |
| increase in average consumption uncertainty concentrated among poorer households (D19) | dampened effect on aggregate consumption (E21) |
| idiosyncratic risk (D81) | aggregate fluctuations (E10) |
| distribution of uncertainty across households (G59) | net impact of idiosyncratic risk on aggregate fluctuations (D89) |