Risk Sharing Externalities joint with Luigi Bocola
< p style="margin-top: 0cm; margin-right: 0cm; margin-bottom: 0.0001pt; text- align: justify;">Abstract:Macroeconomic models with a financ ial accelerator mechanism are built around two main ingredients: a collater al constraint and incomplete financial markets. The first ingredient implie s that shocks affecting the balance sheet of some agents affect their inves tment decisions, while the second ingredient guarantees that the same agent s cannot hedge these shocks. A commonly held view in the literature is that both ingredients are necessary for the model to produce amplified response s to aggregate shocks. In this paper we revisit this view. In particular, w e focus on a general equilibrium spillover, by which a reduction of the net worth of financially constrained agents lowers incomes and consumption lev els in the rest of economy. The presence of the spillover makes hedging cos tly for the financially constrained agents and leads to amplification even in presence of complete financial markets. Numerical simulations show that this force is quantitatively relevant, as under plausible calibrations the competitive equilibrium with complete markets features a similar degree of amplification as the one with incomplete markets. The same spillover also i mplies that the competitive equilibrium is constrained inefficient and prov ides a rationale for financial regulation that reduces the exposure of fina ncial institutions to aggregate risk.
DTSTAMP:20260404T231347Z DTSTART:20190618T130000Z DTEND:20190618T140000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR