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High Discounts and Low Fundamental Surplus: An Equivalence Result for Unemployment Fluctuations
Ljungqvist and Sargent (2017) (LS) show that unemployment fluctuations can be understoodin terms of a quantity they call the “fundamental surplus.” However, their analysis ignores riskpremia, a force that Hall (2017) shows is important in understanding unemployment fluctuations. Weshow how the LS framework can be adapted to incorporate risk premia. We derive an equivalenceresult that relates parameters in economies with risk premia to those of an artificial economy withoutrisk premia. We show how to use properties of the artificial economy to deduce how risk premia affectunemployment ...
Limited Household Risk Sharing: General Equilibrium Implications for the Term Structure of Interest Rates
We present a theory in which limited risk sharing of idiosyncratic labor income risk plays a key role in determining the dynamics of interest rates. Our production-based model relates the cross-sectional distribution of labor income risk to observable aggregate labor market variables. Our model makes two key predictions. First, it predicts positive risk premia for long-term bonds while simultaneously matching key macroeconomic moments. Second, it predicts a negative correlation between current labor market conditions (as measured by labor market tightness or the job-finding rate) and future ...
Near-Rational Equilibria in Heterogeneous-Agent Models: A Verification Method
We propose a general simulation-based procedure for estimating the quality of approximate policies in heterogeneous-agent equilibrium models, which allows verification that such approximate solutions describe a near-rational equilibrium. Our procedure endows agents with superior knowledge of the future path of the economy, while imposing a suitable penalty for such foresight. The relaxed problem is more tractable than the original, and it results in an upper bound on agents’ welfare. Our method is general and straightforward to implement, and it can be used in conjunction with various ...