{'fraction_non_alphanumeric': 0.013916500994035786, 'fraction_numerical': 0.0, 'mean_word_length': 5.04, 'pattern_counts': {'":': 0, '<': 0, '<?xml version=': 0, '>': 0, 'https://': 0, 'lorem ipsum': 0, 'www.': 0, 'xml': 0}, 'pii_count': 0, 'substrings_counts': 0, 'word_list_counts': {'cursed_substrings.json': 0, 'profanity_word_list.json': 0, 'sexual_word_list.json': 0, 'zh_pornsignals.json': 0}}
Aggregate Risk Sharing and Social Welfare Improvement: Understanding Real Inflation Via the Unit of Welfare

This paper discusses the effects of the agent's risk aversion on macroeconomic volatility via collateralized lending in a real DGE model. By changing the numeraire from the conventional output to an abstract unit of welfare, we can trace the intrinsic value change of output over time so that the resource reallocation processes resulting from an unexpected positive productivity shock can be understood in a much more intuitive way. Given risk-averse agents, we discover the real inflation in case of a positive productivity shock in the real economy, which reduces the predetermined output-denominated debt burden and greatly improves the borrowers' net worth for investment. The effects of small shocks on aggregate output amplify and persist in a much stronger magnitude than in the economy with risk-neutral agents. After making a distinction between the numeraire and the unit of loan contracts, we propose that loans be contracted in terms of the unit of welfare, which has a stable intrinsic value by construction. The debt inflation effects are eliminated and aggregate output becomes much less volatile in case of productivity shocks. The unit-of-welfare regime enable borrowers and lenders to share aggregate risks if we extend this model in a stochastic framework. The social welfare as a whole is improved if agents write loan contracts in terms of the unit of welfare instead of output.