Wealth and Volatility / Jonathan Heathcote, Fabrizio Perri.

Format:

Book

Author/Creator:

Heathcote, Jonathan.

Contributor:

National Bureau of Economic Research.

Perri, Fabrizio.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20994.

NBER working paper series no. w20994

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

Periods of low household wealth in United States macroeconomic history have also been periods of high business cycle volatility. This paper develops a simple model that can exhibit self-fulfilling fluctuations in the expected path for unemployment. The novel feature is that the scope for sunspot-driven volatility depends on the level of household wealth. When wealth is high, consumer demand is largely insensitive to unemployment expectations and the economy is robust to confidence crises. When wealth is low, a stronger precautionary motive makes demand more sensitive to unemployment expectations, and the economy becomes vulnerable to confidence-driven fluctuations. In this case, there is a potential role for public policies to stabilize demand. Microeconomic evidence is consistent with the key model mechanism: during the Great Recession, households with relatively low wealth, ceteris paribus, cut expenditures more sharply.

Notes:

Print version record

February 2015.