Three essays on the insurance of income risk and monetary policy

The primary focus of this thesis is on the explicit incorporation of individual heterogeneity to address two important questions. First, do the households have more information about their income risk as compared to what is assessed by an econometrician? I find that there is a systematic income risk gap: household’s perceived income risk is at least 12 percent lower than what is estimated by an econometrician. Second, is the provision of public insurance necessarily welfare improving in the standard incomplete markets model? I show quantitatively that this may not be the case if one group of individuals receive significantly more public insurance as compared to other groups over time.