Premium
Aggregate Implications of Heterogeneous Households in a Sticky‐Price Model
Author(s) -
LEE JAE WON
Publication year - 2012
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2011.00467.x
Subject(s) - economics , business cycle , consumption (sociology) , imperfect , incentive , microeconomics , aggregate (composite) , price setting , monetary economics , labour economics , macroeconomics , materials science , social science , linguistics , philosophy , sociology , composite material
This paper analyzes the role of heterogeneous households in propagating shocks over the business cycle by generalizing a basic sticky‐price model to allow for imperfect risk sharing between households that differ in labor incomes. I show that imperfectly insured household consumption distorts household incentive to supply labor hours through an idiosyncratic income effect, which in turn generates strategic complementarities in price setting and thus amplifies business cycle fluctuations. This mechanism diminishes the role of nominal rigidities and makes sticky‐price models more consistent with microeconomic evidence on the frequency of price changes.