HANK's Response to Aggregate Uncertainty in an Estimated Business Cycle Model

Cosmin Ilut, Ralph Luetticke and Martin Schneider

No 33331, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies a HANK model with agents who respond to both idiosyncratic and aggregate uncertainty. Since aggregate uncertainty is modeled as ambiguity, it affects the steady state and linearized dynamics, allowing for fast computation and estimation. The interaction of aggregate uncertainty shocks and portfolio frictions generates a high capital premium as well as most cyclical comovement in macroeconomic aggregates. Heterogeneity in portfolios is crucial: when it is shut down, the model fails to explain investment dynamics and the capital premium disappears. Cautious price and wage setting by firms in anticipation of aggregate uncertainty shapes employment and inflation dynamics.

JEL-codes: C11 D31 D81 E32 E63 (search for similar items in EconPapers)
Date: 2025-01
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