We study the impact of income disaster-which can be triggered by various reasons such as pandemics and technological disruption-on Friedman's permanent income hypothesis. Although the hypothesis is still retained, our general equilibrium model offers two insights. First, with income disaster the...

This paper interprets contagion effects as a perceived increase (triggered by events occurring elsewhere) in the volatility of aggregate shocks impinging on the domestic economy. The implications of this approach are analyzed in a model with two types of credit market imperfections: domestic...