The Macroeconomics of Hedging Income Shares

Facundo Piguillem, Adriana Grasso and Juan Passadore

No 14732, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The recent debate about the falling labor share has brought the attention to the income shares' trends, but less attention has been devoted to their variability. In this paper, we analyze how their fluctuations can be insured between workers and capitalists, and the corresponding implications for financial markets. We study a neoclassical growth model with aggregate shocks that affect income shares and financial frictions that prevent firms from fully insuring idiosyncratic risk. We examine theoretically how aggregate risk sharing is distorted by the combination of idiosyncratic risk and moving shares. Accumulation of safe assets by firms and risky assets by households emerges naturally as a tool to insure income shares' risk. We calibrate the model to the U.S. economy and show that low rates, rising capital shares, and accumulation of safe assets by firms and risky assets by households can be rationalized by persistent shocks to the labor share.

Keywords: Income; shares; fluctuation.; risk; sharing.; asset; prices.; corporate; savings; glut (search for similar items in EconPapers)
JEL-codes: E20 E32 E44 G11 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ore
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Related works:
Journal Article: The Macroeconomics of Hedging Income Shares (2024)
Working Paper: The macroeconomics of hedging income shares (2020)
Working Paper: The Macroeconomics of Hedging Income Shares (2020)
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