Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk
Lien Pham-Do and
Authors registered in the RePEc Author Service: Ralph Luetticke ()
No 10849, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Households face large income uncertainty that varies substantially over the business cycle. We examine the macroeconomic consequences of these variations in a model with incomplete markets, liquid and illiquid assets, and a nominal rigidity. Heightened uncertainty depresses aggregate demand as households respond by hoarding liquid ``paper'' assets for precautionary motives, thereby reducing both illiquid physical investment and consumption demand. This translates into output losses, which a central bank can prevent by providing liquidity. We show that the welfare consequences of uncertainty shocks crucially depend on a household's asset position. Households with little human capital but high illiquid wealth lose the most from an uncertainty shock and gain the most from stabilization policy.
Keywords: incomplete markets; nominal rigidities; uncertain shocks (search for similar items in EconPapers)
JEL-codes: E12 E22 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
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Journal Article: Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk (2019)
Working Paper: Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk (2016)
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