Econometrica

Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

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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Supplemental Material

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

This online appendix contains materials not found within the manuscript.

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

This zip file contains the replication files necessary to reproduce the empirical estimates.

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

This zip file contains part of the Matlab code to accompany the paper.

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

This zip file contains data files for the manuscript.