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Title: Three Essays on the Insurance of Income Risk and Monetary Policy

Citation Type: Dissertation/Thesis

Publication Year: 2017

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Abstract: The present dissertation contains three chapters: the first two chapters are associated with incomplete market models and the last chapter is concerned with optimal monetary policy in the Dynamic Stochastic General Equilibrium (DSGE) framework. The first chapter is concerned with structurally estimating the difference between idiosyncratic income risk estimated by an econometrician and what is actually perceived by households. Using the US micro-data to inform the consumption risk sharing model, I estimate that the perceived income risk is at least 12 percent lower than the risk estimated by an econometrician. Accounting for this gap, the model jointly explains three distinct risk sharing measures that are not captured in the standard model without a gap: (i) the cross-sectional variance of consumption, (ii) the covariance of consumption with income growth, and (iii) the income conditional-mean of household consumption. In the second chapter, using the March Current Population Survey, I show that over the last two decades, married households in the United States received increasingly more public insurance against labor income risk, whereas the opposite was true for single households. To evaluate the welfare consequences of this trend, I perform a quantitative analysis. As a novel contribution, I expand the standard incomplete markets model à la Aiyagari (1994) to include two groups of households: married and single. The model allows for changes in the marital status of households and accounts for transition dynamics between steady states. I show that the divergent trends in public insurance have a significant detrimental effect on the welfare of both married and single households. Higher public insurance crowds out the private savings of married households, thus decreasing their mean wealth. In the long run, lower wealth decreases mean consumption for married households, driving the decline in their welfare. For singles, transition dynamics play a major role. Although in response to lower public insurance they save more and can afford higher mean consumption in the new steady state, the welfare loss from lower initial consumption after the policy change offsets this welfare gain. v In the third chapter, I study the role of factor demand linkages in the design of optimal monetary policy. A two-sector New-Keynesian model is developed in which sectors are connected through factor demand linkages and differ in price stickiness. I find two important results: first, the presence of factor demand linkage induces amplification effects in resource mis-allocation and, hence, the concern for price stability becomes more important. Second, the optimal price index is not the same as the aggregate price index, although it does not depend upon factor demand linkages. Furthermore, based on the micro-founded loss function we derive a policy rule that implements the optimal allocation.

Url: https://dare.uva.nl/search?identifier=b8887f17-aaa7-40bc-a3c0-713a40182b24

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Authors: Singh, S

Institution: University of Amsterdam

Department: Economics and Business

Advisor: R.M.W.J. Beetsma

Degree: PhD

Publisher Location: North Holland

Pages: 187

Data Collections: IPUMS CPS

Topics: Labor Force and Occupational Structure

Countries: United States