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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, 2011. "Uninsured countercyclical risk: an aggregation result and application to optimal monetary policy," FRB Atlanta Working Paper 2011-04, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:2011-04
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    1. Optimal monetary policy when asset markets are incomplete
      by Christian Zimmermann in NEP-DGE blog on 2010-09-22 01:49:21

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    Cited by:

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    3. 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.
    4. Shuhei Takahashi, 2020. "Time-Varying Wage Risk, Incomplete Markets, and Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 195-213, July.
    5. repec:hal:spmain:info:hdl:2441/54k1p7hdq38odb1k39k1rdm8di is not listed on IDEAS
    6. Bonciani, Dario & Oh, Joonseok, 2021. "Unemployment risk, liquidity traps and monetary policy," Bank of England working papers 920, Bank of England.
    7. Edouard Challe, 2017. "Uninsured Unemployment Risk and Optimal Monetary Policy," Working Papers 2017-54, Center for Research in Economics and Statistics.
    8. Cheng-Wei Chang & Ching-Chong Lai & Juin-Jen Chang, 2018. "Fiscal Stimulus and Endogenous Firm Entry in a Monopolistic Competition Macroeconomic Model," The Japanese Economic Review, Springer, vol. 69(2), pages 207-225, June.
    9. Gallen, Trevor S., 2021. "Predicting and decomposing why representative agent and heterogeneous agent models sometimes diverge," Economic Modelling, Elsevier, vol. 101(C).
    10. Ivan Sutoris, 2018. "Asset Prices in a Production Economy with Long Run and Idiosyncratic Risk," CERGE-EI Working Papers wp620, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    11. Waki, Yuichiro, 2022. "A cautionary note on linear aggregation in macroeconomic models under the RINCE preferences," Journal of Macroeconomics, Elsevier, vol. 72(C).

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