Econometrica: Jan 2019, Volume 87, Issue 1

Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk

https://doi.org/10.3982/ECTA13601
p. 255-290

Christian Bayer, Ralph Luetticke, Lien Pham‐Dao, Volker Tjaden

Households face large income uncertainty that varies substantially over the business cycle. We examine the macroeconomic consequences of these variations in a model with incomplete markets, liquid and illiquid assets, and a nominal rigidity. Heightened uncertainty depresses aggregate demand as households respond by hoarding liquid “paper” assets for precautionary motives, thereby reducing both illiquid physical investment and consumption demand. We document the empirical response of portfolio liquidity and aggregate activity to surprise changes in idiosyncratic income uncertainty and find both to be quantitatively in line with our model. The welfare consequences of uncertainty shocks and of the policy response thereto depend crucially on a household's asset position.



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Supplement to "Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk"

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Supplement to "Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk"

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Supplement to "Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk"

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Supplement to "Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk"

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