Uninsured idiosyncratic risk, liquidity constraints and aggregate fluctuations

Javier Díaz-Giménez ()

Economic Theory, 1997, vol. 10, issue 3, pages 463-482

Abstract: I study the role played by uninsured idiosyncratic risk and liquidity constraints in the propagation of aggregate fluctuations. To this purpose, I compare the aggregate fluctuations of two model economies that differ in their insurance technologies only. In one of these model economies liquidity constrained households vary their holdings of a nominally denominated asset in order to buffer an uninsured idiosyncratic shock to their individual production opportunities. In the other economy every idiosyncratic component of risk can be costlessly insured. I find that the limited insurance technology implies fluctuations in output that are 20% larger, fluctuations in hours relative to output that are 9% larger, fluctuations in consumption relative to output that are 18% smaller, and a correlation of hours and productivity that is 15% smaller than those that obtain under the full insurance technology.

JEL-codes: D58 E21 E32 E44 (search for similar items in EconPapers)
Date: 1997-09-16
Note: Received: March 6, 1996; revised version August 15, 1996
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