Uninsured Countercyclical Risk: An Aggregation Result and Application to Optimal Monetary Policy

31 Pages Posted: 22 Mar 2015

See all articles by R. Braun

R. Braun

Federal Reserve Bank of Atlanta

Tomoyuki Nakajima

University of Tokyo

Date Written: March 2011

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.

Keywords: uninsured risk, sticky prices, optimal monetary policy

JEL Classification: D52, E32, E52

Suggested Citation

Braun, R. and Nakajima, Tomoyuki, Uninsured Countercyclical Risk: An Aggregation Result and Application to Optimal Monetary Policy (March 2011). FRB Atlanta Working Paper 2011-4, Available at SSRN: https://ssrn.com/abstract=2481056 or http://dx.doi.org/10.2139/ssrn.2481056

R. Braun (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Tomoyuki Nakajima

University of Tokyo ( email )

Yayoi 1-1-1
Bunkyo-ku
Tokyo, Tokyo 113-8657
Japan

HOME PAGE: http://https://sites.google.com/view/tomoyukinakajima/home

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