In this paper, we study consumption risk sharing when individual income shocks are persistent and not publicly observable, and individuals can default on contracts at the price of financial autarky. We find that, in contrast to a model where the only friction is limited enforcement, our model...

We estimate a cointegrated VAR of consumption, household money and their determinants in Chile.We find two long-run relations that can be specified as a classic money-demand equation and aconsumption equation that is homogenous in disposable income. We find that the household money overhang has...

This paper shows how growth in financially open developing countries is affected when relations with international lenders suffer from the danger of moral hazard. We find that if entrepreneurs can gamble with foreign creditors¡¯ money, borrowing under standard debt contracts is constrained by...

This paper shows how two standard models of consumption risk-sharing - self-insurance through borrowing and saving and limited commitment to insurance contracts - replicate similarly well the standard, second-moment measures of insurance observed in US micro-data. A non-parametric analysis,...

The fall in US macroeconomic volatility from the mid-1980s coincided with a strong rise in asset prices. Recently, this rise, and the crash that followed, have been attributed to overconfidence in a benign macroeconomic environment of low volatility. This paper introduces learning about the...

This paper presents a simple model to analyse how moral hazard resulting from information asymmetries in financial markets affects growth in financially open developing countries. We find that if domestic entrepreneurs can gamble with foreign creditors’ money, borrowing under standard debt...

Wealthier people generally hold a larger part of their savings in risky assets. Using the US Survey of Consumer Finances, I show that wealthier households also have a higher portfolio share of foreign assets. This relative home bias of the poor does not seem to be explained by fixed...

This paper looks at the effect of moral hazard, resulting from information asymmetries in financial markets, on growth in financially open developing countries. We show that if domestic entrepreneurs can gamble with foreign creditors' money, borrowing under standard debt contracts is constrained...

When the risk of default constrains financial contracts, public insurance policies can significantly affect private risk-sharing. This is because by changing income expectations and volatility, redistribution changes the attractiveness of default and thus endogenous borrowing constraints....

When default leads to exclusion from financial markets, the implied loss of consumption smoothing opportunities is more costly when income volatility is high. A rise in income risk thus makes default less attractive, allowing creditors to relax borrowing limits. I show how, in an open economy,...