I develop a Heterogeneous-Agent New Keynesian model with dual earner households that matches existing microeconomic evidence on the response of household earnings and consumption to job loss. My model suggests that the low average response of spousal earnings masks its heterogeneous and indirect benefits for consumption smoothing. At the macro level, countercyclical labor supply of secondary earners can stabilize aggregate demand but it also crowds out primary earners searching for jobs. My model predicts that the aggregate demand channel dominates, and spousal insurance is an effective automatic stabilizer.
We propose a general and highly efficient method for solving and estimating general equilibrium heterogeneous-agent models with aggregate shocks in discrete time.
We show that New Keynesian models with frictionless labor supply face a challenge: given standard parameters, they cannot simultaneously match plausible estimates of marginal propen- sities to consume (MPCs), marginal propensities to earn (MPEs), and fiscal multipliers. A HANK model with sticky wages provides a solution to this trilemma.