How Much Consumption Insurance in the U.S.?
by Iourii Manovskii and Dmytro Hryshko
Most of what the profession knows about joint income and consumption dynamics at the household level in the U.S. is based on the data from the Panel Study of Income Dynamics (PSID). We find that there are two sets of households in the PSID that differ dramatically in the dynamics of their income and consumption. Households headed by the original PSID males and their sons have a highly persistent income process, and permanent shocks to their income almost fully pass through to consumption. Household headed by males who marry daughters of the original PSID members have a much less persistent income process and a dramatically higher degree of insurance. These differences are surprising but highly robust. Conditional on income dynamics, the degree of insurance in each subsample is consistent with the prediction of the standard incomplete-markets model. This is in contrast to the famous puzzle in Blundell, Pistaferri, and Preston (2008) of excess insurance of permanent income shocks for the combined sample.view paper