EconPapers    
Economics at your fingertips  
 

Aggregate Consumption in Times of Crisis: The Role of Financial Frictions

Edouard Challe () and Xavier Ragot ()

Post-Print from HAL

Abstract: The joint behaviour of US aggregate consumption and saving over the period 2007-2009, and notably the pronouned U-shaped pattern of consumption together with the rise in saving, are difficult to reconcile with the view that financial markets are frictionless. We propose an alternative framework in which financial markets are incomplete and where households form a buffer stock of precautionary saving to self-insure against the (time-varying) risk of falling into unemployment, with the consequence of considerably amplifying and propagating crises. Our model can be solved in closed form because the wealth heterogeneity generated by uninsured income shocks remains minimal. We end the article by arguing that fully incorporating uninsured and time-varying individual risks into macroeconomic analysis may drastically alter our understanding of the business cycle, macroeconomic policy, and the role of financial intermediaries.

Keywords: Incomplete markets; unemployment; consumption (search for similar items in EconPapers)
Date: 2010
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00944933
References: Add references at CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Published in CESifo Economic Studies, Oxford University Press (OUP), 2010, 56 (4), pp.627-648. 〈10.1093/cesifo/ifq006〉

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: Aggregate Consumption in Times of Crisis: The Role of Financial Frictions (2010)
Working Paper: Aggregate Consumption in Times of Crisis: The Role of Financial Frictions (2010) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00944933

DOI: 10.1093/cesifo/ifq006

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().

 
Page updated 2019-11-22
Handle: RePEc:hal:journl:halshs-00944933