Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/232598
Authors: 
Oh, Joonseok
Rogantini Picco, Anna
Year of Publication: 
2020
Series/Report no.: 
Sveriges Riksbank Working Paper Series No. 395
Abstract: 
This paper shows how uninsurable unemployment risk is crucial to qualitatively and quantitatively match macro responses to uncertainty shocks. Empirically, uncertainty shocks i) generate deflationary pressure; ii) have considerably negative consequences on economic activity; iii) produce a drop in aggregate consumption, which is mainly driven by the response of the households in the bottom 60% of the income distribution. Standard representative-agent New Keynesian models have difficulty to deliver these effects. A heterogeneous-agent framework with search and matching frictions and Calvo pricing allows us to jointly attain these results. Uncertainty shocks induce households' precautionary saving and firms' precautionary pricing behaviors, triggering a fall in aggregate demand and supply. These precautionary behaviors increase the unemployment risk of the imperfectly insured households, who strengthen precautionary saving. When the feedback loop between unemployment risk and precautionary saving is strong enough, a rise in uncertainty leads to i) a drop in inflation; ii) amplified negative responses of macro variables; iii) heterogeneous consumption responses of households, which are consistent with the empirical evidence.
Subjects: 
Uncertainty shock
Inflation
Unemployment risk
Precautionary savings
JEL: 
E12
E31
E32
J64
Document Type: 
Working Paper

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