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Uninsured Countercyclical Risk: An Aggregation Result And Application To Optimal Monetary Policy

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  • R. Anton Braun
  • Tomoyuki Nakajima

Abstract

We 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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  • R. Anton Braun & Tomoyuki Nakajima, 2012. "Uninsured Countercyclical Risk: An Aggregation Result And Application To Optimal Monetary Policy," Journal of the European Economic Association, European Economic Association, vol. 10(6), pages 1450-1474, December.
  • Handle: RePEc:bla:jeurec:v:10:y:2012:i:6:p:1450-1474
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    File URL: http://hdl.handle.net/10.1111/j.1542-4774.2012.01091.x
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    Cited by:

    1. Edouard Challe & Xavier Ragot, 2016. "Precautionary Saving Over the Business Cycle," Economic Journal, Royal Economic Society, vol. 126(590), pages 135-164, February.
    2. Fatih Guvenen & Serdar Ozkan & Jae Song, 2014. "The Nature of Countercyclical Income Risk," Journal of Political Economy, University of Chicago Press, vol. 122(3), pages 621-660.
    3. Edouard Challe, 2017. "Uninsured Unemployment Risk and Optimal Monetary Policy," Working Papers 2017-54, Center for Research in Economics and Statistics.

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