Active stabilization policy and uninsurable risks

Active demand management policies may have positive welfare effects through the implicit (social) insurance provided by stabilizing wrt to uninsurable risks. The present paper presents an intertemporal general equilibrium model for an economy with a capital market imperfection and shows that monetary policy is effective, and that there is a positive welfare effect of an active stabilization policy. The welfare effect arises via a reduction of risk premia in wages.