Household Income Risk, Nominal Frictions, and Incomplete Markets

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

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: This paper examines the effects of changes in uncertainty of household income on the macroeconomy. Households face substantial idiosyncratic income risk that is up to two orders of magnitude larger than total factor productivity uncertainty, very persistent and varies substantially over the business cycle. We build a New Keynesian model with heterogeneous agents, where changes in precautionary savings due to time-varying uncertainty depress aggregate activity. With countercyclical markups through sticky prices, increased precautionary savings lower aggregate demand and generate significant output losses as the economy is demand-driven in the short-run. The decline in output is more severe, if the central bank is constrained by the zero lower bound. Our results imply that household income uncertainty may be an important factor in explaining the persistent decline of consumption during the Great Recession.

JEL-codes: E21 E32 E58 (search for similar items in EconPapers)
Date: 2013
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 (2)

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Working Paper: Household Income Risk, Nominal Frictions, and Incomplete Markets (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc13:79868

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