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Incomplete Markets, Growth, And The Business Cycle
George-Marios Angeletos Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER) Laurent E. Calvet HEC School of Management - Department of Finance and Economics; National Bureau of Economic Research (NBER) January 2001 MIT Dept. of Economics Working Paper No. 00-33, Harvard Institute of Economic Research Paper No. 1910 Abstract: We introduce a Ramsey growth model with incomplete markets, decentralized production, and idiosyncratic technological risk. The combination of uninsurable shocks with the precautionary motive can slow down capital accumulation or give rise to persistent fluctuations even when agents are very patient and technology is strictly convex. The model generates closed-form for the equilibrium dynamics under a finite or infinite horizon. Multiple steady states and poverty traps can arise from the endogeneity of the interest rate instead of the usual wealth effect. 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. In calibrated examples, financial incompleteness substantially slows down convergence to the steady state and thus increases the persistence of aggregate shocks.
Keywords: Idiosyncratic Risk, Precautionary Motive, Endogenous Fluctuations. JEL Classifications: C6, D52, D9, E32, O16, O4 Working Paper SeriesDate posted: January 19, 2001 ; Last revised: November 26, 2003Suggested CitationContact Information
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