Idiosyncratic production risk, growth, and the business cycle
By: George-Marios Angeletos and Laurent E. Calvet
Contributors: Calvet, Laurent E.; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 02-10; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 02-10.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2002
Place of publication: Cambridge, MA
Language: eng
Number of pages: 37
Description: We introduce a neoclassical growth economy with idiosyncratic production risk and incomplete markets. The general equilibrium is characterized in closed form. Uninsurable production shocks introduce a risk premium on private equity and typically result in a lower steady-state level of capital than under complete markets. In the presence of such risks, the anticipation of low investment and high interest rates in the future feeds back into a high risk premium and low investment in the present. The endogenous countercyclicality of the risk premium generates a macroeconomic complementarity between future and current investment, which slows down convergence and amplifies the magnitude and persistence of the business cycle. These results - in sharp contrast with Aiyagari (1994) and Krusell and Smith (1998) - highlight that idiosyncratic production or capital-income risk can have significant adverse effects on capital accumulation and aggregate volatility. Keywords: Entrepreneurial Risk, Investment, Growth, Fluctuations, Precautionary Savings, Capital income.
Notes: "February 2002."

Includes bibliographical references (p. 34-37).

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