We construct, and then estimate by maximum likelihood, a tractable dynamic stochastic general equilibrium model with incomplete insurance and heterogenous agents. The key feature of our framework is that cross-sectional heterogeneity remains finite dimensional. The solution to the model thus...

The joint behaviour of US aggregate consumption and saving over the period 20072009, and notably the pronouned U-shaped pattern of consumption together with the rise in saving, are difficult to reconcile with the view that financial markets are frictionless. We propose an alternative framework...