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Uninsured Idiosyncratic Investment Risk

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  • George-Marios Angeletos

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.

Suggested Citation

  • George-Marios Angeletos, 2005. "Uninsured Idiosyncratic Investment Risk," NBER Working Papers 11180, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:11180
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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. sunanda roy, 2005. "Asset prices and capital accumulation in a monetary economy with incomplete markets," GE, Growth, Math methods 0508002, University Library of Munich, Germany.
    3. Fatih Guvenen, 2007. "Do Stockholders Share Risk More Effectively than Nonstockholders?," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 275-288, May.
    4. sunanda roy, 2007. "On price uncertainty, nominal assets and uninsurable idiosyncratic risks," Economics Bulletin, AccessEcon, vol. 4(32), pages 1-17.
    5. Djumashev, R, 2007. "Corruption, uncertainty and growth," MPRA Paper 3716, University Library of Munich, Germany.
    6. repec:ebl:ecbull:v:4:y:2007:i:32:p:1-17 is not listed on IDEAS
    7. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," Levine's Working Paper Archive 786969000000000384, David K. Levine.

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    More about this item

    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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