Unemployment risk, MPC heterogeneity, and business cycles

This paper uses an estimated Heterogeneous Agent New Keynesian (HANK) model to evaluate the quantitative importance of two channels in driving aggregate consumption fluctuations US: (i) precautionary savings against unemployment risk and (ii) MPC heterogeneity. I find that heterogeneity is dominant channel because a large fraction households are close borrowing limit. The empirical average target HANK generates counterfactually volatile consumption, thus makes it more difficult for match persistence data, indicating puzzle. likelihood‐based estimation favors low degree nominal rigidity responsive monetary policy reduce discrepancy between volatility data. endogenous variables model.