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.

Photo of Luigi Bocola

Luigi Bocola  

Abstract: 

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.

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Published Aug. 5, 2019 7:41 PM - Last modified Sep. 2, 2019 9:25 AM