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Uninsured Idiosyncratic Investment Risk

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Author Info
George-Marios Angeletos

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Abstract

This paper augments the neoclassical growth model to study the macroeconomic effects of idiosyncratic investment risk. The general equilibrium is solved in closed form under standard assumptions for preferences and technologies. A simple condition is identified for incomplete markets to result in both a lower interest rate and a lower capital stock in the steady state: the elasticity of intertemporal substitution must be higher than the income share of capital. For plausible calibrations of the model, the reduction in the steady-state levels of aggregate savings and income relative to complete markets is quantitatively significant. Finally, cyclical variation in private investment risks is shown to amplify the transitional dynamics.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11180.

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Date of creation: Mar 2005
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Handle: RePEc:nbr:nberwo:11180

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Find related papers by JEL classification:
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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References listed on IDEAS
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    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. sunanda roy, 2005. "Asset prices and capital accumulation in a monetary economy with incomplete markets," GE, Growth, Math methods 0508002, EconWPA. [Downloadable!]
  2. Fatih Guvenen, 2005. "Do Stockholders Share Risk More Effectively Than Non- stockholders?," Macroeconomics 0508006, EconWPA. [Downloadable!]
    Other versions:
  3. Djumashev, R, 2007. "Corruption, uncertainty and growth," MPRA Paper 3716, University Library of Munich, Germany. [Downloadable!]
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