Partial Insurance with Earnings, Incomes and Housing


We develop and extend the partial insurance framework in three key directions: First, we make precise the way the smoothing of labour income shocks depends on the detailed holdings of housing and financial assets, the persistence of labour income shocks, and the nature of the tax and social insurance system. Second, we introduce a separate mechanism by which house prices shocks impact consumption, differentiating between owners and renters and allowing local house price shocks to be correlated with local income shocks. Third, by exploiting differences in the location of parents and children, we allow younger families with living parents to react to shocks to parents' house prices. We show that each one of these features is crucial in accurately recovering the pass through of income and house price shocks to consumption.