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Households face large income uncertainty that varies substantially over the business cycle. We examine the macroeconomic consequences of these variations in a model with incomplete markets, liquid and illiquid assets, and a nominal rigidity. Heightened uncertainty depresses aggregate demand as households respond by hoarding liquid “paper” assets for precautionary motives, thereby reducing both illiquid physical investment and consumption demand. We document the empirical response of portfolio liquidity and aggregate activity to surprise changes in idiosyncratic income uncertainty and find both to be quantitatively in line with our model. The welfare consequences of uncertainty shocks and of the policy response thereto depend crucially on a household's asset position

We empirically establish that one-third of job transitions leads to wagelosses. Using a quantitative on-the-job search model, we find that60 percent of them are movements down the job ladder. Accountingfor them, our baseline calibration matches the large residual wageinequality in US data while attributing only 13.7 percent of overallwage inequality to the presence of search frictions in the labormarket. We can trace the difference between ours and previous muchhigher estimates to our explicit modeling of nonvalue improvingjob-to-job transitions This research has received funding from the European Research Council under the European Union’s Seventh Framework Programme (FTP/2007–2013)/ERC Grant agreement no. 282740. Both authors gratefully acknowledge support from the Deutsche Forschungsgemeinschaft (DFG) through the Bonn Graduate School of Economics

I present a dynamic fixed cost model of export participation extended by a capital theoretic concept of the customer stock. Plants that want to start exporting have to invest into a market specific factor which serves as input into a decreasing returns to scale technology generating sales demand. Customer capital, like phyical capital, depreciates over time and its accumulation is subject to adjustment costs. It allows the model to reproduce the empirical fact that new exporters show above average revenue growth rates and a declining exit hazard in the years after entry. I structurally estimate the model on a rich panel data set of German manufacturing plants between 1995 and 2008. During the observed time span, plants in the sample saw a strong increase in export activity which provides a suitable case study for the predictive power of the model. Unlike a pure fixed cost version, the model correctly forecasts a steep rise in exports after 2003. It is also able to reconcile a strong export reaction to trade liberalizations with a low elasticity of aggregate exports to exchange rate movements. Customer capital accumulation therefore offers a potential resolution to the elasticity puzzle in international economics.

This paper examines the effects of changes in uncertainty of household income on the macroeconomy. Households face substantial idiosyncratic income risk that is up to two orders of magnitude larger than total factor productivity uncertainty, very persistent and varies substantially over the business cycle. We build a New Keynesian model with heterogeneous agents, where changes in precautionary savings due to time-varying uncertainty depress aggregate activity. With countercyclical markups through sticky prices, increased precautionary savings lower aggregate demand and generate significant output losses as the economy is demand-driven in the short-run. The decline in output is more severe, if the central bank is constrained by the zero lower bound. Our results imply that household income uncertainty may be an important factor in explaining the persistent decline of consumption during the Great Recession.

Capital reallocation creates excess volatility in investment in many two-country open economy models. Convex adjustment costs to capital have become a standard tool to deal with this. However, current microeconomic investment models feature non-convex adjustment costs as the dominant friction. This paper analyzes fixed costs to capital adjustment in a two-country business cycle model and finds that fixed costs – unlike in closed economies – dampen aggregate investment volatilities. Moreover, convex adjustment costs can serve as a stand-in for these fixed adjustment costs when one is interested in aggregate dynamics only. Yet, the mapping between fixed and quadratic adjustment costs co-depends on other model parameters.