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Macro Uncertainty, Unemployment Risk, And Consumption Dynamics

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  • Joonseok Oh
  • Anna Rogantini Picco

Abstract

Households' income heterogeneity is important to explain consumption dynamics in response to aggregate macro uncertainty: an increase in uncertainty generates a consumption drop that is stronger for lower‐income households. At the same time, labor markets are strongly responsive to macro uncertainty. A heterogeneous‐agent New Keynesian model with search‐and‐matching frictions in the labor market can account for these empirical findings. The mechanism at play is a feedback loop between lower‐income households who, being subject to higher unemployment risk, contract consumption more in response to heightened uncertainty, and firms that post fewer vacancies following a drop in demand.

Suggested Citation

  • Joonseok Oh & Anna Rogantini Picco, 2025. "Macro Uncertainty, Unemployment Risk, And Consumption Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 66(1), pages 287-312, February.
    • Handle: RePEc:wly:iecrev:v:66:y:2025:i:1:p:287-312
    DOI: 10.1111/iere.12730
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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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