Uninsured countercyclical risk: an aggregation result and application to optimal monetary policy
AbstractWe consider an incomplete-markets economy with capital accumulation and endogenous labor supply. Individuals face countercyclical idiosyncratic labor and asset risk. We derive conditions under which the aggregate allocations and price system can be found by solving a representative agent problem. This result is applied to analyze the properties of an optimal monetary policy in a new Keynesian economy with uninsured countercyclical individual risk. The optimal monetary policy that emerges from our incomplete-markets economy is the same as the optimal monetary policy in a representative agent model with preference shocks. When price rigidity is the only friction, the optimal monetary policy calls for stabilizing the inflation rate at zero.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2011-04.
Date of creation: 2011
Date of revision:
Other versions of this item:
- Richard Anton Braun & Tomoyuki Nakajima, 2009. "Uninsured countercyclical risk: an aggregation result and@application to optimal monetary policy," CARF F-Series CARF-F-182, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Nov 2010.
- NEP-ALL-2011-04-02 (All new papers)
- NEP-CBA-2011-04-02 (Central Banking)
- NEP-MAC-2011-04-02 (Macroeconomics)
- NEP-MON-2011-04-02 (Monetary Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Optimal monetary policy when asset markets are incomplete
by Christian Zimmermann in NEP-DGE blog on 2010-09-21 20:49:21
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