UNINSURED IDIOSYNCRATIC INVESTMENT RISK

George-Marios Angeletos ()

No 11180, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D52 E13 E32 G11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-fin and nep-mac
Date: 2005-03
Note: EFG
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