Imperfect Risk Sharing and the Business Cycle

Department of Economics & Decision Sciences

Speaker : Alessandro Dovis

Assistant Professor at University of Pennsylvania

Videoconference

Abstract :

This paper studies the macroeconomic implications of imperfect risk sharing implied by a class of New Keynesian models with heterogeneous agents. The models in this class can be equivalently represented as an economy with a representative household that has state-dependent preferences. These preference wedges are functions of households’ consumption shares and relative wages, and they identify the key cross-sectional moments that are relevant for the business cycle implications of these models, making them ideal calibration targets. We measure the wedges using US household-level data, and feed them into the equivalent representative-agent economy to perform counterfactuals. We find that deviations from perfect risk sharing account for only 7% of output volatility, but can have much larger output effects when nominal interest rates reach their lower bound.