Monetary transmission with income risk*

In periods of distress, observed and perceived income risk tends to rise. Does this heightened affect monetary transmission? This paper first shows that in partial equilibrium, dampens the substitution effect interest rate changes but amplifies indirect wage changes. The effects are sizable equilibrium. An increase consistent with during recessions affects responses by around one-third. However, because changes, its is weaker general dampening transmissions consumption 11 percent.