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Time-Varying Employment Risks and Consumption: A Quantitative General Equilibrium Study


  • Nirei, Makoto
  • Sarker, Sanjib


This paper quantifies the effect of time-varying employment risks on the fluctuations of aggregate consumption in a dynamic general equilibrium with incomplete markets. A government's redistribution policy through provision of unemployment insurance can cause a positive correlation between aggregate consumption and government's payments due to precautionary savings effects. The underlying mechanism is that a reduction of unemployment risk increases expected lifetime income substantially across a wide range of asset-holding groups when the risk reduction is sufficiently persistent. By contrast, the correlation between consumption and government becomes negative when government intervention hampers supply of goods.

Suggested Citation

  • Nirei, Makoto & Sarker, Sanjib, 2008. "Time-Varying Employment Risks and Consumption: A Quantitative General Equilibrium Study," IIR Working Paper 08-04, Institute of Innovation Research, Hitotsubashi University.
  • Handle: RePEc:hit:iirwps:08-04

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    Time-varying idiosyncratic risk; employment risk; precautionary savings; regime-switching fiscal policy;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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