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Uninsured Idiosyncratic Investment Risk

  • George-Marios Angeletos

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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File URL: http://www.nber.org/papers/w11180.pdf
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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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Publication status: published as George-Marios Angeletos, 2007. "Uninsured Idiosyncratic Investment Risk and Aggregate Saving," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 1-30, January.
Handle: RePEc:nbr:nberwo:11180
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