Income volatility

Financial Innovation and Risk Management

In 2013, Robert Shiller shared the Nobel Prize for Economics with Eugene Fama and Lars Peter Hansen for their research on asset pricing. While Shiller is known as a critic of the efficient markets hypothesis and as a proponent of behavioral finance, less appreciated is his work on advancing financial technology to help societies manage fundamental economic risks.

At a time when the recent crisis has given financial innovation a bad name, Shiller’s contrarian message is that well-designed financial instruments and markets are an enormous boon to social welfare. We agree.

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Do U.S. Households Benefit from the Great Moderation?

Something odd has happened to the U.S. economy over the past 30 years. Aggregate income (measured by real GDP) has become more stable (even including the 2007-2009 Great Recession). But, at the household level, the volatility of income has gone up. Put differently, families face greater income risk than in the past despite generally fewer or smaller economy-wide wobbles. What should we make of this?

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