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Money With Idiosyncratic Uninsurable Returns To Capital

  • Miquel Faig

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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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number faig-00-01.

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Length: 49 pages
Date of creation: 11 Feb 2000
Date of revision:
Handle: RePEc:tor:tecipa:faig-00-01
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  1. Taub, B, 1988. "Efficiency in a Pure Currency Economy with Inflation," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 567-83, October.
  2. Faig, Miquel, 2000. "Money with Idiosyncratic Uninsurable Returns to Capital," Journal of Economic Theory, Elsevier, vol. 94(2), pages 218-240, October.
  3. Alvarez, Fernando & Stokey, Nancy L., 1998. "Dynamic Programming with Homogeneous Functions," Journal of Economic Theory, Elsevier, vol. 82(1), pages 167-189, September.
  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. Timothy J. Kehoe & David K. Levine & Michael Woodford, 1990. "The optimum quantity of money revisited," Working Papers 404, Federal Reserve Bank of Minneapolis.
  6. D. K. Foley & M. F. Hellwig, 1973. "Asset Management with Trading Uncertainty," Working papers 108, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. 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.
  8. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  9. 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.
  10. Faig, Miquel, 2000. "The Optimal Structure of Liquidity Provided by a Self-Financed Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 746-65, November.
  11. Mehrling, Perry, 1995. "A note on the optimum quantity of money," Journal of Mathematical Economics, Elsevier, vol. 24(3), pages 249-258.
  12. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  13. Levine, David K., 1991. "Asset trading mechanisms and expansionary policy," Journal of Economic Theory, Elsevier, vol. 54(1), pages 148-164, June.
  14. 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.
  15. Bewley, Truman, 1983. "A Difficulty with the Optimum Quantity of Money," Econometrica, Econometric Society, vol. 51(5), pages 1485-504, September.
  16. 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.
  17. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
  18. S Rao Aiyagari & Mark Gertler, 1997. "Asset Returns with transaction costs and uninsured individual risk," Levine's Working Paper Archive 648, David K. Levine.
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