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Download or read book Idiosyncratic Production Risk, Growth and the Business Cycle written by George-Marios Angeletos and published by . This book was released on 2003 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.