Uninsured idiosyncratic risk, liquidity constraints and aggregate fluctuations |
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Authors: | Javier Díaz-Giménez |
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Institution: | (1) Departamento de Economía, Universidad Carlos III de Madrid, Calle Madrid 126, E-28903 Getafe, SPAIN, ES |
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Abstract: | Summary. I study the role played by uninsured idiosyncratic risk and liquidity constraints in the propagation of aggregate fluctuations.
To this purpose, I compare the aggregate fluctuations of two model economies that differ in their insurance technologies only.
In one of these model economies liquidity constrained households vary their holdings of a nominally denominated asset in order
to buffer an uninsured idiosyncratic shock to their individual production opportunities. In the other economy every idiosyncratic
component of risk can be costlessly insured. I find that the limited insurance technology implies fluctuations in output that
are 20% larger, fluctuations in hours relative to output that are 9% larger, fluctuations in consumption relative to output
that are 18% smaller, and a correlation of hours and productivity that is 15% smaller than those that obtain under the full
insurance technology.
Received: March 6, 1996; revised version August 15, 1996 |
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Keywords: | JEL Classification Numbers: D58 E21 E32 E44 |
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