This paper introduces a dynamic, structural model of household consumption decisions in which elderly families consider the effects of uncertain future medical expenses when deciding current levels of consumption. The model with uncertain medical expenses implies a potentially important role for precautionary saving incentives to explain slow rates of dissaving among elderly Americans during retirement. Rather than just simulating the stochastic dynamic model, preference parameters are estimated using panel data on health, wealth and expenditures for retired families. The health uncertainty model predicts consumption levels closer to observed expenditures than a life cycle model with uncertain longevity. However, elderly families typically dissave their financial assets more slowly than even the baseline health uncertainty model predicts is optimal.

The Integrated Financial and Real System of National Accounts for the United States: Does It Presage the Financial Crisis? by Michael G. Palumbo and Jonathan A. Parker. Published in volume 99, issue 2, pages 80-86 of American Economic Review, May 2009

The Effects of Population Aging on the Relationship among Aggregate Consumption, Saving, and Income by Karen E. Dynan, Wendy Edelberg and Michael G. Palumbo. Published in volume 99, issue 2, pages 380-86 of American Economic Review, May 2009

We provide a framework for assessing the build-up of vulnerabilities to the U.S. financial system. We collect forty-six indicators of financial and balance-sheet conditions, cutting across measures of valuation pressures, nonfinancial borrowing, and financial-sector health. We place the data in economic categories, track their evolution, and develop an algorithmic approach to monitoring vulnerabilities that can complement the more judgmental approach of most official-sector organizations. Our approach picks up rising imbalances in the U.S. financial system through the mid-2000s, presaging the financial crisis. We also highlight several statistical properties of our approach: most importantly, our summary measures of system-wide vulnerabilities lead the credit-to-GDP gap (a key gauge in Basel III and related research) by a year or more. Thus, our framework may provide useful information for setting macroprudential policy tools such as the countercyclical capital buffer.