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The macroeconomics of hedging income shares

Adriana Grasso, Juan Passadore () and Facundo Piguillem ()
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Juan Passadore: Einaudi Institute for Economics and Finance (EIEF)

No 1283, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The recent debate about the falling share of labor income has brought attention to the trends in income shares, but less attention has been devoted to their variability. In this paper, we analyze how their fluctuations can be insured against 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 interest 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: 2020-06
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-mac, nep-ore and nep-rmg
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Related works:
Working Paper: The Macroeconomics of Hedging Income Shares (2020) Downloads
Working Paper: The Macroeconomics of Hedging Income Shares (2020) Downloads
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