Welfare Costs of Idiosyncratic and Aggregate Consumption Shocks

I estimate welfare benefits of eliminating idiosyncratic consumption shocks in the US unrelated to the business cycle as 50-59% of household utility and benefits of eliminating idiosyncratic shocks related to the business cycle as lower than 3% of utility. Estimates of the former exceed earlier ones because I distinguish between idiosyncratic shocks related/unrelated to the business cycle, estimate the negative skewness of shocks, target moments of idiosyncratic shocks from household-level CEX data, and target market moments. Benefits of eliminating aggregate shocks are lower than 1% of utility. Policy should focus on facilitating the insurance of idiosyncratic shocks unrelated to the business cycle, such as the death of a household’s prime wage earner and job layoffs not necessarily related to recessions