This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Journal: Macroeconomics
  4. Forthcoming Articles
  5. Idiosyncratic Income Risk and Aggregate Fluctuations

Idiosyncratic Income Risk and Aggregate Fluctuations

  • Davide Debortoli
  • Jordi Galí
American Economic Journal: Macroeconomics (Forthcoming)

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.

Downloads