Research

The business cycles literature has recently embraced heterogeneous-agent (HA) models, which generate large and dispersed marginal propensities to consume (MPCs), in line with the data. In this paper, we focus on the precautionary saving implications of these models, a less-studied feature. We first show that two calibrated versions of the model, one with standard and another with present-biased preferences, can both match MPC profiles as well as a host of other moments, but differ in their predictions for precautionary saving. We then measure the
precautionary saving channel in the data by studying the response of asset accumulation to variation in unemployment insurance (UI) schedules across U.S. states as well as over time. We find small, statistically non-significant effects. Reproducing our empirical design using
model-simulated data, the empirical estimates reject the standard model but are in line with the present-biased model. To illustrate the implications of this difference, we study the stabilization properties of UI in an estimated HA New Keynesian model. In standard HA models,
UI affects aggregate consumption largely by reducing precautionary saving. By weakening this effect, a model with present bias predicts a fiscal multiplier of temporary UI extensions 40% smaller than a standard model. Moreover, it predicts UI to have a smaller effect in reducing
aggregate consumption volatility, being therefore a less powerful automatic stabilizer as well.

How do firms shape the transmission of macroeconomic shocks and policy? Financial accelerator theories emphasize the role of firm-level financing frictions in amplifying the macroeconomic impact of aggregate shocks. While this literature generally focuses on capital investment, we consider how the effects of monetary shocks are amplified through links between financing frictions and labor demand. Under financial acceleration, firms reduce labor demand as financing constraints become more severe in response to adverse shocks, lowering labor income, and thereby aggregate demand. We empirically test this channel with a “micro-to-macro” approach based off the universe of US public firms. We first show that firms that ex ante appear to be relatively financially constrained contract employment more after a monetary tightening. We then assess the aggregate implications of this employment channel through a regional design. We construct measures of a given county’s exposure to public firms with differential financial constraints, and document that more exposed counties exhibit stronger employment declines following contractionary monetary shocks. Preliminary evidence suggests that within-county spillovers of constrained firms to the regional labor market are concentrated in non-tradable establishments, suggesting that interactions between aggregate demand and financial amplification through employment are operative.