Idiosyncratic Income Risk and Aggregate Fluctuations

Davide Debortoli and Jordi Galí

No 29704, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E21 E32 (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-cwa, nep-dge and nep-mac
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Related works:
Journal Article: Idiosyncratic Income Risk and Aggregate Fluctuations (2024)
Working Paper: Idiosyncratic Income Risk and Aggregate Fluctuations (2022)
Working Paper: Idiosyncratic Income Risk and Aggregate Fluctuations (2021)
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