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

Listed author(s):
  • Alisdair McKay

    (Boston University)

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.

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Paper provided by Society for Economic Dynamics in its series 2014 Meeting Papers with number 71.

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Date of creation: 2014
Handle: RePEc:red:sed014:71
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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