Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk

Christian Bayer, Volker Tjaden, Lien Pham-Do and Lütticke, Ralph
Authors registered in the RePEc Author Service: Ralph Luetticke

No 10849, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Households face large income uncertainty that varies substantially over the business cycle. We examine the macroeconomic consequences of these variations in a model with incomplete markets, liquid and illiquid assets, and a nominal rigidity. Heightened uncertainty depresses aggregate demand as households respond by hoarding liquid ``paper'' assets for precautionary motives, thereby reducing both illiquid physical investment and consumption demand. This translates into output losses, which a central bank can prevent by providing liquidity. We show that the welfare consequences of uncertainty shocks crucially depend on a household's asset position. Households with little human capital but high illiquid wealth lose the most from an uncertainty shock and gain the most from stabilization policy.

Keywords: Incomplete markets; Nominal rigidities; Uncertain shocks (search for similar items in EconPapers)
JEL-codes: E12 E22 E32 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Related works:
Journal Article: Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk (2019)
Working Paper: Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk (2016)
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