Journal Article

A Life-Cycle Model with Individual Volatility Dynamics

Abstract: This article solves a heterogeneous-agents, life-cycle model with idiosyncratic, time-varying volatility. Volatility is modeled based on an ARCH specification. I compare the life-cycle behavior of savings and consumption in a model with idiosyncratic volatility versus typical models with constant income risk. Idiosyncratic volatility generates a larger incentive to save precautionarily and, as a result, a lower consumption inequality.

Keywords: Volatility; Economics;

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Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Economic Quarterly

Publication Date: 2020

Volume: 4Q

Pages: 159-171