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Econ Focus: Adjusting to Income Risk

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  • Anthony Hui

Abstract

A common question in economics and finance is how households respond to changes in income risk. Theory predicts that when households' incomes become more volatile, they may save more, work more, or reduce their holdings of risky assets to compensate for their increased risk. In a recent article in the Review of Economic Dynamics, Marios Karabarbounis of the Richmond Fed, Yongsung Chang and Jay Hong of Seoul National University, Yicheng Wang of Peking University, and Tao Zhang of the Ragnar Frisch Centre for Economic Research examined how households adjust their financial portfolio in response to changes in income risk. Income risk is distinct from income level in that it pertains to the uncertainty of future earnings rather than current earnings.

Suggested Citation

  • Anthony Hui, 2022. "Econ Focus: Adjusting to Income Risk," Econ Focus, Federal Reserve Bank of Richmond, vol. 22(4Q), pages 1-16.
    • Handle: RePEc:fip:fedrrf:95335
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