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Macro uncertainty, unemployment risk, and consumption dynamics

Author

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  • Oh, Joonseok
  • Picco, Anna Rogantini

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 income poorer households. At the same time, labor markets are strongly responsive to macro uncertainty as the unemployment rate and the job separation rate rise, while the job finding rate falls. 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 income poorer 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. JEL Classification: E12, E31, E32, J64

Suggested Citation

  • Oh, Joonseok & Picco, Anna Rogantini, 2024. "Macro uncertainty, unemployment risk, and consumption dynamics," Working Paper Series 2971, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20242971
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    More about this item

    Keywords

    HANK and SaM; households' income heterogeneity; precautionary savings;
    All these keywords.

    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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