Limited household risk sharing: General equilibrium implications for the term structure of interest rates

Arbeitspapier

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 crosssectional 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 bond excess returns. We provide evidence for these predictions.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2020-20

Classification and Topics

• Classification: Wirtschaft ; Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity ; Interest Rates: Determination, Term Structure, and Effects ; Financial Markets and the Macroeconomy ; Asset Pricing; Trading Volume; Bond Interest Rates ; Unemployment: Models, Duration, Incidence, and Job Search
• Subject: interest rates ; nondiversifiable labor income risk ; labor market frictions ; bond risk premia

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Mitra, Indrajit ; Xu, Yu
• Event: Veröffentlichung
• (who): Federal Reserve Bank of Atlanta
• (where): Atlanta, GA
• (when): 2020

Further information

• DOI: doi:10.29338/wp2020-20
• Handle: http://hdl.handle.net/10419/244301
• Last update: 10.03.2025, 11:42 AM CET