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 effects of rising college costs, wage inequality, and delinquencies on growing student debt balances in the U.S. We build an incomplete-markets overlapping-generation (OLG) model with choices for a college education, student loans, and delinquency. We solve transitional dynamics with the estimated time-varying changes in college costs and wage inequality, in addition to a stronger preference for college education, that affect the repayment decision of borrowers. We find that these sources increase aggregate student debt balances by $480 billion between 1979 and 2015. Rising college costs increase borrowing by recent college students. The declining average ability of college students and increasing volatility of wage shocks lead to a higher delinquency rate among borrowers over time. Importantly, we find that when borrowers are not delinquent on their payments, the aggregate student debt only increases by 50% of the increase in the benchmark economy, despite all the time-varying sources. This suggests that although the rising college costs largely affect the borrowing behavior of college students, the increasing delinquency rate over time significantly contributes to the rapid growth of U.S. student debt.