DP3924 Families as Shocks
In this Paper we show the quantitative importance of the process that determines changes in family composition to determine the main macroeconomic magnitudes. We do so by modeling family type as a stochastic process that affects households in a way similar to shocks to earnings. Agents respond to these processes by optimally choosing savings. We show that the size of savings differs dramatically depending on the details of the stochastic process. The model is quantitative: its fundamental parameters are estimated using US data.