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

Bayer, C; Luetticke, R; Pham-Dao, L; Tjaden, V; (2019) Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk. Econometrica , 87 (1) pp. 255-290. 10.3982/ECTA13601. Green open access

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Abstract

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

Type: Article
Title: Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk
Open access status: An open access version is available from UCL Discovery
DOI: 10.3982/ECTA13601
Publisher version: https://doi.org/10.3982/ECTA13601
Language: English
Additional information: This is the published version of record. For information on re-use, please refer to the publisher’s terms and conditions.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10049831
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