Durable Goods, Borrowing Constraints and Consumption Insurance
In this paper we study the transmission of income shocks into nondurable consumption in the presence of durable goods. We use a standard a life-cycle model with two goods to characterize the interaction of durability of goods, durability of shocks, and borrowing constraints as determinants of shock transmission. We show that borrowing constraints lead to a substitution between durable and non-durable goods upon arrival of an unexpected income change. This substitution biases the conventional measures of insurance based on the response of non-durable consumption to income changes. The sign of this bias depends critically on the persistence of the shock. We show that households have less insurance against transitory shocks and more insurance against permanent shocks than commonly measured. We calibrate the model economy to the US in order to measure the size of this bias.
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- Martin Browning & Thomas F. Crossley, 2009.
"Shocks, Stocks, and Socks: Smoothing Consumption Over a Temporary Income Loss,"
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MIT Press, vol. 7(6), pages 1169-1192, December.
- Martin Browning & Thomas F. Crossley, 2004. "Shocks, stocks and socks: smoothing consumption over a temporary income loss," CAM Working Papers 2004-05, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
- Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2009.
"Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States, 1967-2006,"
NBER Working Papers
15483, National Bureau of Economic Research, Inc.
- Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
- Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2009. "Unequal we stand: an empirical analysis of economic inequality in the United States, 1967-2006," Staff Report 436, Federal Reserve Bank of Minneapolis.
- Heathcote, Jonathan & Perri, Fabrizio & Violante, Giovanni L, 2009. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States, 1967-2006," CEPR Discussion Papers 7538, C.E.P.R. Discussion Papers.
- Greg Kaplan, 2010.
"Moving back home: insurance against labor market risk,"
449, Federal Reserve Bank of Minneapolis.
- Greg Kaplan, 2012. "Moving Back Home: Insurance against Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 120(3), pages 446 - 512.
- Greg Kaplan, 2010. "Moving back home: insurance against labor market risk," Working Papers 677, Federal Reserve Bank of Minneapolis.
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