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Incomplete Market Dynamics in a Neoclassical Production Economy

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  • George-Marios Angeletos
  • Laurent-Emmanuel Calvet

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 risk-taking 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

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 2058.

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Date of creation: 2005
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Handle: RePEc:fth:harver:2058

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Citations

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Cited by:
  1. Ratbek Dzhumashev, 2007. "Corruption, Uncertainty And Growth," Development Research Unit Working Paper Series 15-07, Monash University, Department of Economics.
  2. Jess Benhabib & Alberto Bisin & Shenghao Zhu, 2014. "The Wealth Distribution in Bewley Economies with Investment Risk," NBER Working Papers 20157, National Bureau of Economic Research, Inc.
  3. 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.
  4. George-Marios Angeletos, 2005. "Uninsured Idiosyncratic Investment Risk," NBER Working Papers 11180, National Bureau of Economic Research, Inc.
  5. Fabià Gumbau-Brisa, 2005. "Heterogeneous beliefs and inflation dynamics: a general equilibrium approach," Working Papers 05-16, Federal Reserve Bank of Boston.
  6. Mark A. Carlson & Thomas B. King & Kurt F. Lewis, 2009. "Distress in the financial sector and economic activity," Finance and Economics Discussion Series 2009-01, Board of Governors of the Federal Reserve System (U.S.).
  7. 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.
  8. Dzhumashev, Ratbek, 2008. "Corruption and Disposable Risk," MPRA Paper 11772, University Library of Munich, Germany.
  9. 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.
  10. Djumashev, R, 2007. "Corruption, uncertainty and growth," MPRA Paper 3716, University Library of Munich, Germany.

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