Money and Risk Sharing

Robert Reed () and Christopher J. Waller

Journal of Money, Credit and Banking, 2006, vol. 38, issue 6, 1599-1618

Abstract: We study the use of money for sharing consumption risk. In our model, agents randomly receive endowments at some points in time and produce at other points. Due to information frictions, agents cannot use intertemporal contracts to share risk. The use of money allows agents to overcome these information frictions. The Friedman rule is shown to generate efficient risk sharing. Furthermore, we quantify the welfare costs of incomplete risk sharing and find that with 10% inflation, the welfare cost of inefficient risk sharing is approximately 1%-1.5% of steady-state consumption.

Date: 2006
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