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  4. October 2024
  5. Idiosyncratic Income Risk and Aggregate Fluctuations

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

Idiosyncratic Income Risk and Aggregate Fluctuations

  • Davide Debortoli
  • Jordi Galí
American Economic Journal: Macroeconomics
vol. 16, no. 4, October 2024
(pp. 279–310)
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Abstract

We study how the presence of idiosyncratic income risk affects aggregate fluctuations in the absence of binding borrowing constraints and/or cyclical income risk. Its impact is shown to be captured by the response of a consumption-weighted average of individual consumption risk to aggregate shocks. We analyze 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.

Citation

Debortoli, Davide, and Jordi Galí. 2024. "Idiosyncratic Income Risk and Aggregate Fluctuations." American Economic Journal: Macroeconomics, 16 (4): 279–310. DOI: 10.1257/mac.20220382

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
  • E21 Macroeconomics: Consumption; Saving; Wealth
  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • E32 Business Fluctuations; Cycles
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