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 admits a statespace representation that can be used to recover the distribution of the model's parameters. Household heterogeneity expands the set of observables to crosssectional moments available at the business-cycle frequency (in addition to the Edouard Quantitative Economics 8 (2017) usual macro and monetary time series). Incomplete insurance gives rise to a precautionary motive for holding wealth that propagates aggregate shocks via (i) a stabilizing aggregate supply effect, working through the supply of capital, and (ii) a destabilizing aggregate demand effect coming from the feedback loop between unemployment risk and precautionary saving. Using the estimated model to measure the contribution of precautionary savings to the propagation of recent recessions, we find strong aggregate demand effects during the Great Recession and, to a lesser extent, during the 1990-1991 recession. In contrast, the supply effect at least offsets the demand effect during the 2001 recession.

We study the macroeconomic implications of time-varying precautionary saving in a tractable general equilibrium model with both aggregate and uninsurable idiosyncratic risk. In the model, agents facing incomplete markets and borrowing constraints respond to countercyclical changes in unemployment risk by altering their bu¤er stock of wealth, with a direct impact on aggregate consumption. In a calibrated version of the model, the response of aggregate consumption to a typical NBER recession is found to be twice as large as that implied by a comparable representative agent economy, and about 30% larger than that implied by a comparable economy with full insurance but wherein a fraction of households permanently faces a binding borrowing constraint. JEL codes: E20, E21, E32

The distribution of money across households is much more similar to the distribution of financial assets than to that of consumption expenditures. This is a puzzle for theories which directly link money demand to consumption. This paper shows that the joint distribution of money and financial assets can be explained in a heterogeneous-agent model where both a cash-in-advance constraint and financial adjustment costs, as in the Baumol-Tobin literature, are introduced. Studying each friction in turn, one finds that the financial friction explains more than 78% of total money demand