Mykhailo Matvieiev

We study the effect of age-specific income risk shocks on consumption. First, we analytically establish the link between precautionary saving motive and the age-specific income risk. We show that the magnitude of consumption response to the age-specific income risk shock is related to the marginal propensity to consume. Second, we identify the age-specific labor income risk shocks in U.S. data. The age-specific income risk shocks have a disproportionally strong effect on the income risk of old workers. We show that the identified age-specific income risk shock leads to a decrease in aggregate consumption, with consumption of the middle-aged workers experiencing the most pronounced drop after the shock. Finally, we build a quantitative heterogeneous-agent OLG model to evaluate the relevance of the precautionary saving motive for our empirical results. We find that precautionary motive may explain the empirically observed magnitude of consumption response to the age-specific income risk shock at the aggregate level and across age groups.