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Money and Risk Sharing

Author

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  • Reed, Robert R.
  • Waller, Christopher J.

Abstract

We study the use of money for sharing consumption risk. In our model, agents randomly receive endowments at some points in time and produce at other points. Due to information frictions, agents cannot use intertemporal contracts to share risk. The use of money allows agents to overcome these information frictions. The Friedman rule is shown to generate efficient risk sharing. Furthermore, we quantify the welfare costs of incomplete risk sharing and find that with 10% inflation, the welfare cost of inefficient risk sharing is approximately 1%-1.5% of steady-state consumption.

Suggested Citation

  • Reed, Robert R. & Waller, Christopher J., 2006. "Money and Risk Sharing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1599-1618, September.
    • Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:6:p:1599-1618
    DOI: 10.1353/mcb.2006.0087
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    Citations

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    Cited by:

    1. Veronica Guerrieri & Guido Lorenzoni, 2009. "Liquidity and Trading Dynamics," Econometrica, Econometric Society, vol. 77(6), pages 1751-1790, November.
    2. Ben Craig & Guillaume Rocheteau, 2008. "Inflation and Welfare: A Search Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 89-119, February.
    3. Rocheteau, Guillaume, 2012. "The cost of inflation: A mechanism design approach," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1261-1279.
    4. Ghossoub, Edgar A. & Reed, Robert R., 2014. "The cost of capital, asset prices, and the effects of monetary policy," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 211-228.
    5. Lagos, Ricardo, 2010. "Asset prices and liquidity in an exchange economy," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 913-930, November.
    6. Edgar A. Ghossoub & Robert Reed, 2009. "The Cost Of Capital, Asset Prices And The Affects Of Monetary Policy," Working Papers 0068, College of Business, University of Texas at San Antonio.
    7. Boel, Paola & Camera, Gabriele, 2009. "Financial sophistication and the distribution of the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 968-978, October.
    8. TINA M. Edgar A. Ghossoub, 2012. "Economic Development and the Welfare Costs of Inflation It has been widely observed that the role of money in the ?nancial system varies across developing and advanced countries. While the connections," Working Papers 0034, College of Business, University of Texas at San Antonio.
    9. Haitao Xiang, 2013. "Optimal monetary policy: distribution efficiency versus production efficiency," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 46(3), pages 836-864, August.
    10. Edgar A. Ghossoub & Andre Harrison & Robert R. Reed, 2024. "Capital controls, banking competition, and monetary policy," Economic Inquiry, Western Economic Association International, vol. 62(3), pages 1369-1399, July.
    11. Ben Craig & Guillaume Rocheteau, 2008. "Inflation and Welfare: A Search Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 89-119, February.
    12. repec:dau:papers:123456789/7353 is not listed on IDEAS
    13. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    14. Nicolas L. Jacquet & Serene Tan, 2011. "Money, Bargaining, and Risk Sharing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 419-442, October.
    15. Hamid Beladi & Edgar Ghossoub, 2012. "Central Bank Liquidity Provision and Financial Sector Competition This paper presents a general equilibrium production economy where money is essential and financial intermediaries provide important e," Working Papers 0002, College of Business, University of Texas at San Antonio.

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