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Idiosyncratic Income Risk and Aggregate Fluctuations

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  • Davide Debortoli
  • Jordi Galí

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.

Suggested Citation

  • Davide Debortoli & Jordi Galí, 2021. "Idiosyncratic Income Risk and Aggregate Fluctuations," Working Papers 1281, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1281
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    Cited by:

    1. Billi, Roberto & Galí, Jordi & Nakov, Anton, 2024. "Optimal monetary policy with r∗<0," Journal of Monetary Economics, Elsevier, vol. 142(C).
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    3. Takahashi, Yuta & Takayama, Naoki, 2022. "Hidden Stagflation," Discussion Paper Series 733, Institute of Economic Research, Hitotsubashi University.
    4. 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 households; economic fluctuations; aggregate shocks; 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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