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Incomplete-market dynamics in a neoclassical production economy

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  • Angeletos, George-Marios
  • Calvet, Laurent-Emmanuel

Abstract

We investigate a neoclassical economy with heterogeneous agents, convex technologies and idiosyncratic production risk. Combined with precautionary savings, investment risk generates rich effects that do not arise in the presence of pure endowment risk. Under a finite horizon, multiple growth paths and endogenous fluctuations can exist even when agents are very patient. In infinite-horizon economies, multiple steady states may arise from the endogeneity of risktaking and interest rates instead of the usual wealth effects. Depending on the economy's parameters, the local dynamics around a steady state are locally unique, totally unstable or locally undetermined, and the equilibrium path can be attracted to a limit cycle. The model generates closed-form expressions for the equilibrium dynamics and easily extends to a variety of environments, including heterogeneous capital types and multiple sectors.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 41 (2005)
Issue (Month): 4-5 (August)
Pages: 407-438

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Handle: RePEc:eee:mateco:v:41:y:2005:i:4-5:p:407-438

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Citations

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Cited by:
  1. Angeletos, George-Marios & Calvet, Laurent-Emmanuel, 2006. "Idiosyncratic production risk, growth and the business cycle," Journal of Monetary Economics, Elsevier, vol. 53(6), pages 1095-1115, September.
  2. Eva Carceles-Poveda, 2009. "Asset Prices and Business Cycles under Market Incompleteness," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 405-422, July.
  3. Angeletos, George-Marios & Panousi, Vasia, 2009. "Revisiting the supply side effects of government spending," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 137-153, March.
  4. Dzhumashev, Ratbek, 2008. "Corruption and Disposable Risk," MPRA Paper 11772, University Library of Munich, Germany.
  5. Djumashev, R, 2007. "Corruption, uncertainty and growth," MPRA Paper 3716, University Library of Munich, Germany.
  6. Mark A. Carlson & Thomas B. King & Kurt F. Lewis, 2008. "Distress in the financial sector and economic activity," Finance and Economics Discussion Series 2008-43, Board of Governors of the Federal Reserve System (U.S.).
  7. FabiĆ  Gumbau-Brisa, 2005. "Heterogeneous beliefs and inflation dynamics: a general equilibrium approach," Working Papers 05-16, Federal Reserve Bank of Boston.
  8. Jess Benhabib & Alberto Bisin & Shenghao Zhu, 2014. "The Wealth Distribution in Bewley Models with Investment Risk," NBER Working Papers 20157, National Bureau of Economic Research, Inc.
  9. George-Marios Angeletos, 2005. "Uninsured Idiosyncratic Investment Risk," NBER Working Papers 11180, National Bureau of Economic Research, Inc.
  10. Ratbek Dzhumashev, 2007. "Corruption, Uncertainty And Growth," Development Research Unit Working Paper Series 15-07, Monash University, Department of Economics.

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