A Life-Cycle Model with Individual Volatility Dynamics

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.