PhD Student, London School of Economics (LSE)
Abstract: Precautionary saving is a key driver of wealth inequality within models of the Bewley-Huggett-Aiyagari canon. However, models with savings rates calibrated solely to idiosyncratic income risk find it difficult to replicate the vast wealth inequality empirically observed in the United States. This paper looks at a potential source of increased precautionary savings - idiosyncratic medical expenses shocks. This paper: i. establishes an identification procedure for medical expenditure shocks across the entire life cycle, ii. finds that idiosyncratic shocks are very highly persistent, iii. establishes the extent to which these shocks contribute to wealth inequality through the effect on savings behaviour.
Department of Economics
London School of Economics and Political Science (LSE)