Idiosyncratic risk, insurance, and aggregate consumption dynamics: a likelihood perspective

Alisdair McKay

No 71, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: This paper shows how the empirical implications of incomplete markets models can be assessed using the same full-information methods that are commonly used for representative agent models. It then asks what features of the microeconomic insurance arrangement are important for understanding the dynamics of aggregate consumption as it relates to aggregate labor income and employment conditions. A model with a low level of insurance against unemployment risk and an intermediate level of insurance against individual skill shocks provides the best fit of the aggregate data. A model that matches the strong consumption responses to fiscal stimulus payments does not improve the overall fit to the aggregate data.

Date: 2014
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