Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

Abstract: This paper shows how uninsurable unemployment risk is crucial to qualitatively and quantitatively match macro responses to uncertainty shocks. Empirically, uncertainty shocks i) generate deflationary pressure; ii) have considerably negative consequences on economic activity; iii) produce a drop in aggregate consumption, which is mainly driven by the response of the households in the bottom 60% of the income distribution. Standard representative-agent New Keynesian models have difficulty to deliver these effects. A heterogeneous-agent framework with search and matching frictions and Calvo pricing allows us to jointly attain these results. Uncertainty shocks induce households' precautionary saving and firms' precautionary pricing behaviors, triggering a fall in aggregate demand and supply. These precautionary behaviors increase the unemployment risk of the imperfectly insured households, who strengthen precautionary saving. When the feedback loop between unemployment risk and precautionary saving is strong enough, a rise in uncertainty leads to i) a drop in inflation; ii) amplified negative responses of macro variables; iii) heterogeneous consumption responses of households, which are consistent with the empirical evidence.

Keywords: Uncertainty shock; Inflation; Unemployment risk; Precautionary savings

JEL-codes: E12; E31; E32; J64

64 pages, October 1, 2020

Full text files

no.-395-macro-uncert...nemployment-risk.pdf  Full text

Download statistics

• Sveriges Riksbank (Central Bank of Sweden)
• Ordering Working Papers
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Lena Löfgren ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2024-02-05 17:13:28.