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 Richard Blundell, Luigi Pistaferri, and Ian Preston (2008) (BPP hereafter) on US data. Households in the data have access to more consumption insurance
against permanent earnings shocks than in the model. BPP estimate that 36 percent of permanent shocks are insurable, whereas the model's counterpart of the BPP estimator varies between 7 percent and 22 percent, depending on the tightness of debt limits. We also show that the BPP estimator has a downward bias that grows as borrowing limits become tighter. (JEL D31, D91, E21).
"How Much Consumption Insurance beyond Self-Insurance?"
American Economic Journal: Macroeconomics,
Personal Income, Wealth, and Their Distributions
Intertemporal Consumer Choice; Life Cycle Models and Saving
Macroeconomics: Consumption; Saving; Wealth