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Macro Uncertainty and Unemployment Risk

Joonseok Oh and Anna Rogantini Picco ()
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Anna Rogantini Picco: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

No 395, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: This paper shows how uninsurable unemployment risk is crucial to qualitatively and quantitatively match macro responses to uncertainty shocks. Empirically, uncertainty shocks i) generate deflationary pressure; ii) have considerably negative consequences on economic activity; iii) produce a drop in aggregate consumption, which is mainly driven by the response of the households in the bottom 60% of the income distribution. Standard representative-agent New Keynesian models have difficulty to deliver these effects. A heterogeneous-agent framework with search and matching frictions and Calvo pricing allows us to jointly attain these results. Uncertainty shocks induce households' precautionary saving and firms' precautionary pricing behaviors, triggering a fall in aggregate demand and supply. These precautionary behaviors increase the unemployment risk of the imperfectly insured households, who strengthen precautionary saving. When the feedback loop between unemployment risk and precautionary saving is strong enough, a rise in uncertainty leads to i) a drop in inflation; ii) amplified negative responses of macro variables; iii) heterogeneous consumption responses of households, which are consistent with the empirical evidence.

Keywords: Uncertainty shock; Inflation; Unemployment risk; Precautionary savings (search for similar items in EconPapers)
JEL-codes: E12 E31 E32 J64 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2020-10-01
New Economics Papers: this item is included in nep-dge, nep-lab, nep-mac and nep-ore
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Working Paper: Macro uncertainty and unemployment risk (2019) Downloads
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