A Life-Cycle Model with Individual Volatility Dynamics

Marios Karabarbounis

Economic Quarterly, 2020, vol. 4Q, 159-171

Abstract: This article solves a heterogeneous-agents, life-cycle model with idiosyncratic, time-varying volatility. Volatility is modeled based on an ARCH specification. I compare the life-cycle behavior of savings and consumption in a model with idiosyncratic volatility versus typical models with constant income risk. Idiosyncratic volatility generates a larger incentive to save precautionarily and, as a result, a lower consumption inequality.

Keywords: Volatility; Economics (search for similar items in EconPapers)
Date: 2020
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DOI: 10.21144/eq1060402

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