Incomplete Market Dynamics in a Neoclassical Production Economy

37 Pages Posted: 27 Jan 2005 Last revised: 8 Mar 2013

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: December 2004

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 risktaking 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.

Suggested Citation

Angeletos, George-Marios and Calvet, Laurent E., Incomplete Market Dynamics in a Neoclassical Production Economy (December 2004). NBER Working Paper No. w11016. Available at SSRN: https://ssrn.com/abstract=639942

George-Marios Angeletos (Contact Author)

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

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National Bureau of Economic Research (NBER)

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Laurent E. Calvet

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

France

CEPR ( email )

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