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Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk
Author(s) -
Bayer Christian,
Luetticke Ralph,
PhamDao Lien,
Tjaden Volker
Publication year - 2019
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta13601
Subject(s) - economics , precautionary savings , aggregate (composite) , aggregate income , systematic risk , econometrics , monetary economics , market liquidity , income distribution , inequality , mathematics , mathematical analysis , materials science , composite material
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. We document the empirical response of portfolio liquidity and aggregate activity to surprise changes in idiosyncratic income uncertainty and find both to be quantitatively in line with our model. The welfare consequences of uncertainty shocks and of the policy response thereto depend crucially on a household's asset position.