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Risk-Taking, Inequality and Output in the Long-Run

Shuhei Aoki, Makoto Nirei and Kazufumi Yamana ()

No 18-E-4, Bank of Japan Working Paper Series from Bank of Japan

Abstract: We develop a tractable dynamic general equilibrium model with incomplete markets for business risk sharing, which allows for analytical characterization under Epstein-Zin preference with unitary elasticity of intertemporal substitution and Cobb-Douglas technology. Household stationary wealth dispersion is shown to follow a Pareto distribution. In this environment, we conduct comparative statics of stationary output and household inequality when the cost of business risk sharing is reduced. Enhanced risk-taking results in greater long-run outputs and real wage and a lower risk-free interest rate, while its impact on inequality is ambiguous. A quantitative analysis under the parameter values calibrated to Japanese economy shows that elimination of purchase costs for mutual funds leads to an increase in output by 1.3 percent, a decrease in risk-free rate by 15 basis points, and an increase in Gini coefficient of wealth in 2 percentage points.

Keywords: Financial development; risk-free rate; safe asset; Pareto distribution; depository institutions; mutual funds (search for similar items in EconPapers)
JEL-codes: E2 G2 (search for similar items in EconPapers)
Date: 2018-03-12
New Economics Papers: this item is included in nep-dge
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