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Idiosyncratic Income Risk and Aggregate Fluctuations

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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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    3. 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).

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    More about this item

    Keywords

    Heterogeneous agents; Economic fluctuations; Idiosyncratic shocks; Monetary policy; Hank models;
    All these keywords.

    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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