Macro uncertainty, unemployment risk, and consumption dynamics

Oh, Joonseok and Rogantini Picco, Anna (2024) Macro uncertainty, unemployment risk, and consumption dynamics. International Economic Review. (doi:10.1111/iere.12730).

Record type: Article

Abstract

Households' income heterogeneity is important to explain consumption dynamics in response to aggregate macro uncertainty: an increase in uncertainty generates a consumption drop that is stronger for lower-income households. At the same time, labor markets are strongly responsive to macro uncertainty. A heterogeneous-agent New Keynesian model with search-and-matching frictions in the labor market can account for these empirical findings. The mechanism at play is a feedback loop between lower-income households who, being subject to higher unemployment risk, contract consumption more in response to heightened uncertainty, and firms that post fewer vacancies following a drop in demand.

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