Luigi Bocola, Stanford. "Imperfect Risk-Sharing And The Business Cycle"
Department seminar. Luigi Bocola is an an Assistant Professor in the Stanford Economics Department. He will present the paper: "Imperfect Risk-Sharing And The Business Cycle", co-authored by David Berger and Alessandro Dovis.
This paper studies the aggregate implications of imperfect risk-sharing implied by a class of New Keynesian models with idiosyncratic income risk and incomplete ﬁnancial markets. The models in this class can be equivalently represented as an economy with a representative household that has state-dependent preferences. These preference “shocks” are functions of households’ consumption shares and relative wages in the original economy with heterogeneous agents, and they summarize all the information from the cross-section that is relevant for aggregate ﬂuctuations. Our approach is to use this representation as a measurement device: we use the Consumption Expenditure Survey to measure the preference shocks, and feed them into the equivalent representative-agent economy to perform counterfactuals. We ﬁnd that deviations from perfect risk-sharing wereanimportantdeterminantofthebehaviorofaggregatedemandduringtheUSGreat Recession.