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Imperfect Risk-Sharing and the Business Cycle

Author

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  • 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.

Suggested Citation

  • David W. Berger & Luigi Bocola & Alessandro Dovis, 2019. "Imperfect Risk-Sharing and the Business Cycle," NBER Working Papers 26032, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26032
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    13. Kuester, Keith & Gornemann, Nils & Nakajima, Makoto, 2016. "Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy," CEPR Discussion Papers 11233, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Felipe Alves & Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2020. "A Further Look at the Propagation of Monetary Policy Shocks in HANK," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S2), pages 521-559, December.
    2. Fan, Ying & Wang, Yidi & Yang, Zan, 2024. "Offspring’s Uncertainty and Dynastic Decisions: Evidence from Urban China," Working Paper Series 24/4, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    3. Oliwia Komada & Krzysztof Makarski & Joanna Tyrowicz, 2021. "Progressing towards efficiency: the role for labor tax progression in reforming social security," GRAPE Working Papers 57, GRAPE Group for Research in Applied Economics.
    4. Bernstein, Joshua, 2021. "A model of state-dependent monetary policy," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 904-917.
    5. Boar, Corina & Midrigan, Virgiliu, 2022. "Efficient redistribution," Journal of Monetary Economics, Elsevier, vol. 131(C), pages 78-91.
    6. James Bullard & Aarti Singh & Jacek Suda, 2024. "Optimal Macroeconomic Policies in a Heterogeneous World," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(3), pages 991-1041, September.
    7. Maideu-Morera, Gerard, 2024. "Optimal Fiscal Rules and Macroprudential Policies with Sovereign Default Risk," TSE Working Papers 24-1534, Toulouse School of Economics (TSE).
    8. Jae Won Lee & Seunghyeon Lee, 2025. "Monetary Non-Neutrality in a Multisector Economy: The Role of Risk-Sharing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 55, January.
    9. Luisa Corrado & Aicha Kharazi, 2022. "Collateral, Household Borrowing, and Income Distribution," BEMPS - Bozen Economics & Management Paper Series BEMPS90, Faculty of Economics and Management at the Free University of Bozen.
    10. Jaccard, Ivan, 2021. "Leveraged property cycles," Working Paper Series 2539, European Central Bank.
    11. Corina Boar & Virgiliu Midrigan, 2020. "Efficient Redistribution," NBER Working Papers 27622, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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