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We assess the degree of consumption smoothing implicit in a calibrated life-cycle version of the standard incomplete-markets model, and we compare it to the empirical estimates of Blundell et al. (2008) (BPP hereafter). We find that households in the model have access to less consumption-smoothing against permanent earnings shocks than what is measured in the data. BPP estimate that 36% of permanent shocks are insurable (i.e., do not translate into consumption growth), whereas the model's counterpart of the BPP estimator varies between 7% and 22%, depending on the tightness of debt limits. In the model, the age profile of the insurance coefficient is sharply increasing, whereas BPP find no clear age slope in their estimate. Allowing for a plausible degree of “advance information” about future earnings does not reconcile the model-data gap. If earnings shocks display mean reversion, even with very high autocorrelation, then the average degree of consumption smoothing in the model agrees with the BPP empirical estimate, but its age profile remains steep. Finally, we show that the BPP estimator of the true insurance coefficient has, in general, a downward bias that grows as borrowing limits become tighter.

Zonder onderwerpscode: economie

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We analyze the role of household heterogeneity for the response of the macroeconomy to aggregate shocks. After summarizing how macroeconomists have incorporated household heterogeneity and market incompleteness in the study of economic fluctuations so far, we outline an emerging framework that combines Heterogeneous Agents (HA) with nominal rigidities, as in New Keynesian (NK) models, that is much better aligned with the micro evidence on consumption behavior than its Representative Agent (RA) counterpart. By simulating consistently calibrated versions of HANK and RANK models, we convey two broad messages. First, the degree of equivalence between models crucially depends on the shock being analyzed. Second, certain interesting macroeconomic questions concerning economic fluctuations can only be addressed within HA models, and thus the addition of heterogeneity broadens the range of problems that can be studied by economists. We conclude by recognizing that the development of HANK models is still in its infancy and by indicating promising directions for future work.

Zonder onderwerpscode: economie

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Zonder onderwerpscode: financiewezen

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Macroeconomics is evolving from the study of aggregate dynamics to the study of the dynamics of the entire equilibrium distribution of allocations across individual economic actors. This article reviews the quantitative macroeconomic literature that focuses on household heterogeneity, with a special emphasis on the "standard" incomplete markets model. We organize the vast literature according to three themes that are central to understanding how inequality matters for macroeconomics. First, what are the most important sources of individual risk and cross-sectional heterogeneity? Second, what are individuals' key channels of insurance? Third, how does idiosyncratic risk interact with aggregate risk?

Zonder onderwerpscode: economie