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Idiosyncratic Income Risk and Aggregate Fluctuations

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  • Davide Debortoli
  • Jordi Galí

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.

Suggested Citation

  • Davide Debortoli & Jordi Galí, 2024. "Idiosyncratic Income Risk and Aggregate Fluctuations," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(4), pages 279-310, October.
    • Handle: RePEc:aea:aejmac:v:16:y:2024:i:4:p:279-310
    DOI: 10.1257/mac.20220382
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    Cited by:

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    3. Takahashi, Yuta & Takayama, Naoki, 2022. "Hidden Stagflation," Discussion Paper Series 733, Institute of Economic Research, Hitotsubashi University.
    4. Luzie Thiel, 2023. "Monetary Policy and Inequality: A Two-way Relation," MAGKS Papers on Economics 202304, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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    More about this item

    JEL classification:

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

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