What drove large declines in aggregate quantities over the Great Recession? I study this question by building a dynamic stochastic overlapping generations economy where households hold both low-return liquid and high-return illiquid assets. In this economy, I explore how aggregate quantities and the distribution of households respond to a recession driven by an increased risk of a further economic downturn. I find that a rise in disaster risk, and an empirically consistent fall in TFP, explain a significant fraction of the declines in aggregate consumption and investment observed over the Great Recession. Inequality is essential in driving these aggregate results. Comparing my model to an economy without illiquid assets, I show that household differences in both liquid and illiquid assets play a crucial role in amplifying the effects of a rise in disaster risk.

To what extent does heterogeneity in education contribute to wealth inequality and life-cycle savings, and through which pathways? Using the Panel Study Income Dynamics (PSID) data, I estimate skill-specific wage processes, allowing for both deterministic between-group wage dispersion and stochastic within-group wage dispersion. I evaluate the quantitative implications of these wage processes using an incomplete-markets overlapping-generations general equilibrium model in which households choose their education and labor supply. I find that allowing wage processes to vary by skill levels is crucial to understanding wealth inequality and life-cycle savings of skilled and unskilled households. Importantly, stochastic within-group wage dispersion plays a key role in explaining the concentration of wealth at the top and the large difference in the life-cycle savings between the two skill groups.

This paper examines the quantitative implications of rising college costs, wage inequality, and delinquency for the growth of student debt in the U.S. Rising college costs and wage inequality are introduced as exogenous inputs into an incomplete-markets overlapping-generations model with choices of college attendance, student loans, and delinquency. In the benchmark economy, aggregate student debt rises by $314 billion between 1985 and 2014, accounting for approximately 64% of the observed rise in undergraduate student loans in the U.S. The rise in college costs is the primary driver of the increased borrowing, while the rise in income risk and the decline in student ability lead to higher delinquency rates. Increasing delinquency significantly amplifies debt accumulation: in a counterfactual economy without the option of becoming delinquent, debt increases by only $178 billion. Finally, we show that income-driven repayment (IDR) plans can substantially moderate debt growth, leading to an increase of only $169 billion. This effect arises because IDR reduces delinquency rates by offering greater repayment flexibility.