EconPapers    
Economics at your fingertips  
 

Household Income Risk, Nominal Frictions, and Incomplete Markets

Volker Tjaden, Ralph Lütticke, Lien Pham and Christian Bayer ()
Additional contact information
Volker Tjaden: Bonn University
Ralph Lütticke: Uni Bonn
Lien Pham: Uni Bonn

No 1270, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: This paper examines the effects of changes in uncertainty of household income on the macroeconomy. Households face substantial idiosyncratic income risk that is up to two orders of magnitude larger than total factor productivity uncertainty, very persistent and varies substantially over the business cycle. We build a New Keynesian model with heterogeneous agents, where changes in precautionary savings due to time-varying uncertainty depress aggregate activity. With countercyclical markups through sticky prices, increased precautionary savings lower aggregate demand and generate significant output losses as the economy is demand-driven in the short-run. The decline in output is more severe, if the central bank is constrained by the zero lower bound. Our results imply that household income uncertainty may be an important factor in explaining the persistent decline of consumption during the Great Recession.

Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
https://economicdynamics.org/meetpapers/2013/paper_1270.pdf (application/pdf)

Related works:
Working Paper: Household Income Risk, Nominal Frictions, and Incomplete Markets (2013) 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:red:sed013:1270

Access Statistics for this paper

More papers in 2013 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

 
Page updated 2020-07-07
Handle: RePEc:red:sed013:1270