Risk Aversion, Uninsurable Idiosyncratic Risk, and the Financial Accelerator

Giacomo Candian and Mikhail Dmitriev

Review of Economic Dynamics, 2020, vol. 37, 299-322

Abstract: We develop a tractable model to study jointly the role of non-diversifiable risk and financial frictions for business cycles. Non-diversifiable risk induces strong precautionary motives, which reduce the exposure of entrepreneurs to aggregate disturbances ex-ante, and make it easier to increase leverage ex-post. In general equilibrium, these precautionary motives dampen fluctuations in asset prices and risk premia, thus making the economy more resilient to financial shocks. We provide microeconomic evidence consistent with the model's predictions about firm behavior. (Copyright: Elsevier)

Keywords: Risk aversion; Uninsurable idiosyncratic risk; Financial accelerator; Incomplete markets (search for similar items in EconPapers)
JEL-codes: C68 D81 D82 E44 L26 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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DOI: 10.1016/j.red.2020.03.003

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