Working Paper: NBER ID: w26032
Authors: David W. Berger; Luigi Bocola; Alessandro Dovis
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.
Keywords: No keywords provided
JEL Codes: E32; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| imperfect risk sharing (D52) | output volatility (E23) |
| constraints on monetary policy (E52) | effects of imperfect risk sharing (D81) |
| imperfect risk sharing (D52) | output losses during Great Recession (F69) |
| imperfect risk sharing (D81) | slow recovery during Great Recession (N12) |
| household consumption risk (D11) | aggregate economic performance (E10) |