Incomplete Market Dynamics in a Neoclassical Production Economy

38 Pages Posted: 1 Feb 2005

See all articles by George-Marios Angeletos

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 2005

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.

Keywords: Entrepreneurial Risk, Precautionary Motive, Endogenous Fluctuations, Poverty Traps

JEL Classification: D51, D52, D92, E20, E32

Suggested Citation

Angeletos, George-Marios and Calvet, Laurent E., Incomplete Market Dynamics in a Neoclassical Production Economy (February 2005). MIT Department of Economics Working Paper No. 04-41; Harvard Institute of Economic Research Discussion Paper No. 2058. Available at SSRN: https://ssrn.com/abstract=632861 or http://dx.doi.org/10.2139/ssrn.632861

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

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