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Money with Idiosyncratic Uninsurable Returns to Capital

  • Faig, Miquel

This paper extends the income fluctuations problem to an economy with endogenous growth. In the present setup, individuals, instead of owning an stream of endowments, accumulate capital with an investment irreversibility constraint and face uninsurable idiosyncratic risks to the return to capital. Money provides both a risk diversification and a liquidity role. Balanced growth paths exist despite the increasing dispersion of the wealth distribution. The return to money cannot be equated to the social return to capital (Friedman's rule on the optimum quantity of money) unless the government owns the entire capital stock with idiosyncratic risk, and it is capable of operating this stock as efficiently as private agents can. KEY WORDS: Income fluctuations, uninsurable risk, demand for money, optimum quantity of money.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 94 (2000)
Issue (Month): 2 (October)
Pages: 218-240

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Handle: RePEc:eee:jetheo:v:94:y:2000:i:2:p:218-240
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  1. Miquel Faig, 2000. "Money With Idiosyncratic Uninsurable Returns To Capital," Working Papers faig-00-01, University of Toronto, Department of Economics.
  2. S. Rao Aiyagari & Mark Gertler, 1990. "Asset Returns with Transactions Cost and Uninsured Risk: A Stage III Exercise," NBER Working Papers 3481, National Bureau of Economic Research, Inc.
  3. S Rao Aiyagari & Mark Gertler, 1997. "Asset Returns with transaction costs and uninsured individual risk," Levine's Working Paper Archive 648, David K. Levine.
  4. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
  5. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  6. Mehrling, Perry, 1995. "A note on the optimum quantity of money," Journal of Mathematical Economics, Elsevier, vol. 24(3), pages 249-258.
  7. Taub, B, 1988. "Efficiency in a Pure Currency Economy with Inflation," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 567-83, October.
  8. Timothy J. Kehoe & David K. Levine & Michael Woodford, 1990. "The optimum quantity of money revisited," Working Papers 404, Federal Reserve Bank of Minneapolis.
  9. Bewley, Truman, 1983. "A Difficulty with the Optimum Quantity of Money," Econometrica, Econometric Society, vol. 51(5), pages 1485-504, September.
  10. David K. Levine, 1991. "Asset Trading Mechanisms and Expansionary Policy," Levine's Working Paper Archive 43, David K. Levine.
  11. Alvarez, Fernando & Stokey, Nancy L., 1998. "Dynamic Programming with Homogeneous Functions," Journal of Economic Theory, Elsevier, vol. 82(1), pages 167-189, September.
  12. Duncan K. Foley & Martin F. Hellwig, 1975. "Asset Management with Trading Uncertainty," Review of Economic Studies, Oxford University Press, vol. 42(3), pages 327-346.
  13. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  14. Miquel Faig, 1999. "The Optimal structure of Liquidity Provided by a Self Financed Central Bank," Working Papers faig-99-01, University of Toronto, Department of Economics.
  15. Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, vol. 35(1), pages 19-25, February.
  16. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  17. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
  18. Feldman, Mark & Gilles, Christian, 1985. "An expository note on individual risk without aggregate uncertainty," Journal of Economic Theory, Elsevier, vol. 35(1), pages 26-32, February.
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