Work

Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk

Year: 2019

Type: article

Abstract: Households face large income uncertainty that varies substantially over the business cycle. We examine the macroeconomic consequences of these variations in a model with incomplete markets, liquid and illiquid assets, and a nominal rigidity. Heightened uncertainty depresses aggregate demand as households respond by hoarding liquid ``paper'' assets for precautionary motives, thereby reducing both illiquid physical investment and consumption demand. This translates into output losses, which a central bank can prevent by providing liquidity. We show that the welfare consequences of uncertainty shocks crucially depend on a household's asset position. Households with little human capital but high illiquid wealth lose the most from an uncertainty shock and gain the most from stabilization policy.

Source: Econometrica

DOI: 10.3982/ecta13601

Authors: Christian Bayer, Ralph Luetticke, Lien Pham-Dao, Volker Tjaden

Institution: University of Bonn

Language: English

Topic: Economic theories and models

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: No poverty

Open Access status: green

Funders: European Commission, Deutsche Bundesbank, FP7 Ideas: European Research Council