Idiosyncratic income risk and aggregate fluctuations

Davide Debortoli and Jordi Galí ()
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Jordi Galí: https://www.upf.edu/web/econ/faculty/-/asset_publisher/6aWmmXf28uXT/persona/id/3418866

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We study the role of idiosyncratic income risk for aggregate fluctuations within a simple heterogeneous households framework. We show that the presence of idiosyncratic income shocks affects the economy's response to an aggregate shock even in the absence of binding borrowing constraints and/or cyclical income risk. Their impact can be captured by a consumption-weighted average of the changes in consumption risk generated by an aggregate shock. We apply this framework to two example economies -an endowment economy and a New Keynesian economy- and show that under plausible calibrations the impact of idiosyncratic income risk on aggregate fluctuations is quantitatively small, since most of the changes in consumption risk are concentrated among poorer (low consumption) households.

Keywords: heterogeneous agents; economic fluctuations; aggregate shocks; idiosyncratic shocks; monetary policy; HANK models. (search for similar items in EconPapers)
JEL-codes: E21 E32 E50 (search for similar items in EconPapers)
Date: 2021-07, Revised 2023-06
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-isf and nep-mac
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Idiosyncratic Income Risk and Aggregate Fluctuations (2024)
Working Paper: Idiosyncratic Income Risk and Aggregate Fluctuations (2022)
Working Paper: Idiosyncratic Income Risk and Aggregate Fluctuations (2022)
Working Paper: Idiosyncratic Income Risk and Aggregate Fluctuations (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1796

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