Does Unemployment Risk Affect Business Cycle Dynamics?

Sebastian Graves

American Economic Journal: Macroeconomics, 2025, vol. 17, issue 2, 65-100

Abstract: In this paper, I show that the decline in consumption during unemployment depends on both liquid and illiquid wealth; that unemployment predicts illiquid asset withdrawal, primarily when households have few liquid assets; and that increased idiosyncratic unemployment risk leads to a rise in saving overall, but also to a decline in investment in illiquid assets. Motivated by these new findings, I embed endogenous unemployment risk in a two-asset, heterogeneous-agent New Keynesian model. The model is consistent with the new evidence and suggests that aggregate shocks are amplified by a flight-to-liquidity when unemployment risk rises, particularly when monetary policy is constrained.

JEL-codes: E12 E21 E24 E52 G51 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/mac.20220071

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