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Idiosyncratic Income Risk and Aggregate Fluctuations

Author

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  • Debortoli, Davide
  • Galí, Jordi

Abstract

We study the role of idiosyncratic income shocks for aggregate fluctuations within a simple heterogeneous household framework with no binding borrowing constraints. We show that the presence of idiosyncratic income shocks affects the economy's response to an aggregate shock in a way that can be captured by a consumption-weighted average of the changes in uncertainty generated by the 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 shocks on aggregate fluctuations is quantitatively small, since most of the changes in uncertainty are concentrated among poorer (low consumption) households.

Suggested Citation

  • Debortoli, Davide & Galí, Jordi, 2022. "Idiosyncratic Income Risk and Aggregate Fluctuations," CEPR Discussion Papers 16952, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16952
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    1. is not listed on IDEAS
    2. repec:ecb:ecbdps:202527 is not listed on IDEAS
    3. Billi, Roberto & Galí, Jordi & Nakov, Anton, 2024. "Optimal monetary policy with r∗<0," Journal of Monetary Economics, Elsevier, vol. 142(C).
    4. Bilbiie, F. O. & Galaasen, S. M. & Gurkaynak, R. S. & Maehlum, M. & Molnar, K, 2025. "Hanksson," Cambridge Working Papers in Economics 2516, Faculty of Economics, University of Cambridge.
    5. Davide Debortoli & Jordi Galí, 2025. "Heterogeneity and Aggregate Consumption: An Empirical Assessment," Working Papers 1484, Barcelona School of Economics.
    6. Davide Debortoli & Jordi Galí, 2025. "Heterogeneity and aggregate consumption: An empirical assessment," Economics Working Papers 1903, Department of Economics and Business, Universitat Pompeu Fabra.
    7. Takahashi, Yuta & Takayama, Naoki, 2022. "Hidden Stagflation," Discussion Paper Series 733, Institute of Economic Research, Hitotsubashi University.
    8. Stéphane Dupraz, 2023. "The Dynamic IS Curve when there is both Investment and Savings," Working papers 905, Banque de France.
    9. Luzie Thiel, 2023. "Monetary Policy and Inequality: A Two-way Relation," MAGKS Papers on Economics 202304, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    10. Bilbiie, F. O. & Galaasen, S. M. & Gurkaynak, R. S. & Maehlum, M. & Molnar, K, 2025. "Hanksson," Cambridge Working Papers in Economics 2516, Faculty of Economics, University of Cambridge.

    More about this item

    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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