The Macroeconomics of Hedging Income Shares

87 Pages Posted: 24 Jul 2020

See all articles by Adriana Grasso

Adriana Grasso

Bank of Italy

Juan Passadore

Einaudi Institute for Economics and Finance (EIEF)

Facundo Piguillem

Einaudi Institute for Economics and Finance (EIEF)

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Date Written: June 26, 2020

Abstract

The recent debate about the falling share of labor income has brought attention to the trends in income shares, but less attention has been devoted to their variability. In this paper, we analyze how their fluctuations can be insured against between workers and capitalists, and the corresponding implications for financial markets. We study a neoclassical growth model with aggregate shocks that affect income shares and financial frictions that prevent firms from fully insuring idiosyncratic risk. We examine theoretically how aggregate risk sharing is distorted by the combination of idiosyncratic risk and moving shares. Accumulation of safe assets by firms and risky assets by households emerges naturally as a tool to insure income shares’ risk. We calibrate the model to the U.S. economy and show that low interest rates, rising capital shares, and accumulation of safe assets by firms and risky assets by households can be rationalized by persistent shocks to the labor share.

Keywords: income shares fluctuation, risk sharing, asset prices, corporate savings glut

JEL Classification: E20, E32, E44, G11

Suggested Citation

Grasso, Adriana and Passadore, Juan and Piguillem, Facundo, The Macroeconomics of Hedging Income Shares (June 26, 2020). Bank of Italy Temi di Discussione (Working Paper) No. 1283, Available at SSRN: https://ssrn.com/abstract=3659560 or http://dx.doi.org/10.2139/ssrn.3659560

Adriana Grasso (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Juan Passadore

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Facundo Piguillem

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana, 62
Rome, 00187
Italy

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