Incomplete Markets, Growth, And The Business Cycle

51 Pages Posted: 19 Jan 2001  

George-Marios Angeletos

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Laurent E. Calvet

EDHEC Business School - Department of Economics & Finance; CEPR

Date Written: January 2001

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 Classification: C6, D52, D9, E32, O16, O4

Suggested Citation

Angeletos, George-Marios and Calvet, Laurent E., Incomplete Markets, Growth, And The Business Cycle (January 2001). MIT Dept. of Economics Working Paper No. 00-33, Harvard Institute of Economic Research Paper No. 1910. Available at SSRN: https://ssrn.com/abstract=254709 or http://dx.doi.org/10.2139/ssrn.254709

George-Marios Angeletos

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-251b
Cambridge, MA 02142
United States
617-452-3859 (Phone)
617-253-1330 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Laurent E. Calvet (Contact Author)

EDHEC Business School - Department of Economics & Finance ( email )

France

CEPR ( email )

33 Great Sutton Street
London, EC1V 0DX
United Kingdom

Paper statistics

Downloads
1,568
Rank
8,010
Abstract Views
8,025