Imperfect Risk-Sharing and the Business Cycle

David Berger, Luigi Bocola and Alessandro Dovis

No 26032, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper 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.

JEL-codes: E32 E44 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ore
Note: EFG IFM ME
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Citations: View citations in EconPapers (9)

Published as David Berger & Luigi Bocola & Alessandro Dovis, 2023. "Imperfect Risk Sharing and the Business Cycle," The Quarterly Journal of Economics, vol 138(3), pages 1765-1815.

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