Macro Seminars Amsterdam

Jonathan Heathcote (Federal Reserve Bank of Minneapolis, United States)
Friday, 26 May 2017
Tinbergen Institute Amsterdam, room 1.01AmsterdamNetherlands
Contact person(s)
Bjoern Brugemann, Pieter Gautier, Christian Stoltenberg

Between 2007 and 2013, US households experienced a large and persistent decline in net worth. The objective of this paper is to study the business cycle implications of such a decline. We first develop a tractable monetary model in which households face idiosyncratic unemployment risk that they can partially self-insure using savings. A low level of liquid household wealth opens the door to self-ful lling fluctuations: if wealth-poor households expect high unemployment, they have a strong precautionary incentive to cut spending, which can make the expectation of high unemployment a reality. Monetary policy, because of the zero lower bound, cannot rule out such expectations-driven recessions. In contrast, when wealth is sufficiently high, an aggressive monetary policy can keep the economy glued at full employment. Finally, we document that during the US Great Recession wealth-poor households cut spending much more sharply than richer households, pointing towards the importance of the precautionary channel over this period. Joint with Fabrizio Perri.

Click here to read the paper.