Quantitative Economics

Journal Of The Econometric Society

Edited by: Stéphane Bonhomme • Print ISSN: 1759-7323 • Online ISSN: 1759-7331

Quantitative Economics: May, 2023, Volume 14, Issue 2

Unemployment Risk, MPC Heterogeneity, and Business Cycles

https://doi.org/10.3982/QE1550
p. 717-751

Daeha Cho

This paper uses an estimated Heterogeneous Agent New Keynesian (HANK) model to evaluate the quantitative importance of two channels in driving aggregate consumption fluctuations in the US: (i) precautionary savings against unemployment risk and (ii) MPC heterogeneity. I find that MPC heterogeneity is the dominant channel because a large fraction of households are close to the borrowing limit. The empirical average MPC target in HANK generates counterfactually volatile aggregate consumption, and thus makes it more difficult for the estimated model to match the persistence of the aggregate data, indicating an MPC puzzle. This is because the likelihood‐based estimation favors a low degree of nominal rigidity and responsive monetary policy in the HANK model to reduce the discrepancy between consumption volatility in the model and in the data. The low degree of nominal rigidity and responsive monetary policy reduce the persistence of endogenous variables in the model.


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Supplemental Material

Supplement to "Unemployment Risk, MPC Heterogeneity, and Business Cycles"

Daeha Cho

This zip file contains the replication files for the manuscript.

Supplement to "Unemployment Risk, MPC Heterogeneity, and Business Cycles"

Daeha Cho

This article collects the supplemental contents to the main paper. Section A describes the agents’ optimality conditions. Section B collects the detrended equilibrium conditions. Section C shows the approximation of the detrended equilibrium conditions. Section D describes data and provides additional estimation results. Section E presents additional simulation results. Section F provides additional impulse responses to the estimated shocks.