The application of cointegration and error correction methodology to estimate aggregate consumption equations relating consumer spending to labor income and household wealth shows unequivocally that wealth has significant effect on consumer spending. Still, the long-term marginal propensity to...

We build a New Keynesian business-cycle model with rich household heterogeneity. A central feature is that matching frictions render labor-market risk countercyclical and endogenous to monetary policy. Our main result is that a majority of households prefer substantial stabilization of...