Imperfect Risk Sharing and the Business Cycle

David Berger, Luigi Bocola and Alessandro Dovis

The Quarterly Journal of Economics, 2023, vol. 138, issue 3, 1765-1815

Abstract: This article 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 a representative-agent economy with wedges. These wedges are functions of households’ consumption shares and relative wages, and they identify the key cross-sectional moments that govern the impact of households’ heterogeneity on aggregate variables. We measure the wedges using U.S. household-level data and combine them with a representative-agent economy to perform counterfactuals. We find that deviations from perfect risk sharing implied by this class of models account for only 7% of output volatility on average but can have sizable output effects when nominal interest rates reach their lower bound.

Date: 2023
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Working Paper: Imperfect Risk-Sharing and the Business Cycle (2019)
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