Research

This paper asks how precautionary savings affect the level of the optimal carbon tax. I augment a heterogeneous-agent incomplete-markets model with a climate sector and estimate its structural parameters with indirect inference. As households in the model engage in precautionary saving behavior, it replicates a stylized fact from the data that the marginal propensity to consume pollution-intensive goods decreases with income. Therefore, the carbon tax and the redistribution of its revenue have distributional consequences. When recycling the revenue lump-sum, the optimal carbon tax also serves as an insurance device for the uninsurable idiosyncratic productivity shocks. As a consequence, the optimal tax is higher than what is required to internalize the negative climate externality.

This paper investigates how permanent and transitory credit shocks affect households' consumption smoothing patterns. Using a heterogeneous-agent incomplete-markets model I simulate two different shock specifications as observed in credit panel data; one transitory and one permanent credit shock. I show that consumption insurance drops sharply on impact for both kind of shocks. The permanent shock induces a lower level of consumption insurance in the long run. Moreover, I show that these effects differ by current wealth holdings, with households at the lower end of the wealth distribution experiencing the largest drop. Consumption insurance measures in the data, computed with the new PSID consumption series, suggest that the credit shock induced by the grand financial crisis was transitory in nature. Consumption insurance reaches its trough in 2010, but bounces back to its pre-crisis value by 2016.