Precautionary Saving and Aggregate Demand

@inproceedings{Ragot2013PrecautionarySA,
  title={Precautionary Saving and Aggregate Demand},
  author={Xavier Ragot and Julien Matheron and Juan F. Rubio-Ramirez and Edouard Challe},
  year={2013}
}
This paper introduces incomplete insurance against idioyncratic labour income risk into an otherwise standard New Keynesian business cycle model with involuntary unemployment. Following an adverse monetary policy shock that lowers aggregate demand, job creation is discouraged and unemployment risk persistently rises. Imperfectly insured households rationally respond to the rise in idiosyncratic income uncertainty by increasing precautionary saving, thereby cutting consumption and depleting… CONTINUE READING

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