Incomplete Market Dynamics in a Neoclassical Production Economy

George-Marios Angeletos and Laurent Calvet

No 2058, Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research

Abstract: We investigate a neoclassical economy with heterogeneous agents, convex technologies and idiosyncratic production risk. Combined with precautionary savings, investment risk generates rich effects that do not arise in the presence of pure endowment risk. Under a finite horizon, multiple growth paths and endogenous fluctuations can exist even when agents are very patient. In infinite-horizon economies, multiple steady states may arise from the endogeneity of risk-taking and interest rates instead of the usual wealth effects. Depending on the economy’s parameters, the local dynamics around a steady state are locally unique, totally unstable or locally undetermined, and the equilibrium path can be attracted to a limit cycle. The model generates closed-form expressions for the equilibrium dynamics and easily extends to a variety of environments, including heterogeneous capital types and multiple sectors.

Date: 2005
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Related works:
Journal Article: Incomplete-market dynamics in a neoclassical production economy (2005)
Working Paper: Incomplete Market Dynamics in a Neoclassical Production Economy (2005)
Working Paper: Incomplete Market Dynamics in a Neoclassical Production Economy (2004)
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