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HANK's Response to Aggregate Uncertainty in an Estimated Business Cycle Model

Author

Listed:
  • Cosmin L. Ilut
  • Ralph Luetticke
  • Martin Schneider

Abstract

This paper studies a HANK model with agents who respond to both idiosyncratic and aggregate uncertainty. Since aggregate uncertainty is modeled as ambiguity, it affects the steady state and linearized dynamics, allowing for fast computation and estimation. The interaction of aggregate uncertainty shocks and portfolio frictions generates a high capital premium as well as most cyclical comovement in macroeconomic aggregates. Heterogeneity in portfolios is crucial: when it is shut down, the model fails to explain investment dynamics and the capital premium disappears. Cautious price and wage setting by firms in anticipation of aggregate uncertainty shapes employment and inflation dynamics.

Suggested Citation

  • Cosmin L. Ilut & Ralph Luetticke & Martin Schneider, 2025. "HANK's Response to Aggregate Uncertainty in an Estimated Business Cycle Model," NBER Working Papers 33331, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33331
    Note: AP EFG ME
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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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