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The Macroeconomics of Hedging Income Shares

Adriana Grasso, Juan Passadore and Facundo Piguillem ()
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Juan Passadore: EIEF

No 2009, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: The recent debate about the falling labor share has brought the attention to the income shares’ trends, but less attention has been devoted to their variability. In this paper, we analyze how their fluctuations can be insured 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 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.

Pages: 63 pages
Date: 2020, Revised 2020-05
New Economics Papers: this item is included in nep-dge and nep-rmg
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Working Paper: The macroeconomics of hedging income shares (2020) Downloads
Working Paper: The Macroeconomics of Hedging Income Shares (2020) Downloads
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