This paper investigates how households smooth consumption against idiosyncratic wage shocks in recessions and expansions. Labour market uncertainty amplifies during recessions, captured through the cross-sectional dispersion of wages. I focus on the relative contribution of two insurance mechanisms, namely, adjustments in labour supply and assets. My identification strategy exploits variation in expenditures, hours worked and wages over the business cycle, and is applied to US household panel data. I document a new empirical fact — the contribution of labour supply to consumption smoothing increases during labour market downturns. I then examine the nature of this cyclicality through the lens of a standard life-cycle model with multiple asset-types (liquid and illiquid) and an aggregate state that affects wage dispersion. The model shows that shifts in portfolio composition towards liquid assets in high uncertainty periods can rationalize the empirical observation.
We outline a macro-pandemic model where individuals within occupations can select into working from home or in the market. Market work increases the risk of infection. Occupations differ in the ease of substitution between market and home work, and in the risk of infection. We examine the evolution of a pandemic in the model as well as its macroeconomic and distributional consequences. The model is calibrated to British Columbian data to examine the implications of shutting down different industries by linking industries to occupations. We find that endogenous choice to self-isolate is key: it reduces the peak infection rate by 2 percentage points even without policy mandated lockdowns. Risk aversion generates a large drop and slow recovery. The model also produces widening consumption inequality, a fact that has characterized COVID-19.
Does improving access to financial institutions always facilitate aggregate consumption smoothing? I document new empirical evidence that emerging economies with better access to banks are worse at consumption smoothing, whereas developed economies with better access to banks are better at consumption smoothing. This result is robust to alternative measures of domestic and international financial access and controlling for level of income. A simple one-good small open economy model supplemented with trend shocks and financial access heterogeneity is calibrated to match business cycle moments of developed and emerging markets. The model can qualitatively account for the change in the ratio of consumption volatility to income volatility to financial access for both developed and emerging economies, as seen in the data. A two-sector extension of the model captures the non-targeted business cycle moments too.
Research in progress
1. US monetary policy spillovers to developed and developing countries (with Viktoria Hnatkovska)