Idiosyncratic production risk, growth and the business cycle

George Marios Angeletos*, Laurent Emmanuel Calvet

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

59 Scopus citations


We introduce a neoclassical growth economy with idiosyncratic production risk and incomplete markets. Each agent is an entrepreneur operating her own technology with her own capital stock. The general equilibrium is characterized by a closed-form recursion in the CARA-normal case. Incomplete markets introduce a risk premium on private equity, which reduces the demand for investment. As compared to complete markets, the steady state can thus have both a lower capital stock due to investment risk, and a lower interest rate due to precautionary savings. Furthermore, the anticipation of high real interest rates in the future feeds back into high risk premia and low investment in the present, thus slowing down convergence to the steady state. Our results highlight the importance of private risk premia for capital accumulation and business cycles.

Original languageEnglish (US)
Pages (from-to)1095-1115
Number of pages21
JournalJournal of Monetary Economics
Issue number6
StatePublished - Sep 2006


  • Entrepreneurial risk
  • Incomplete markets
  • Investment
  • Macroeconomic complementarity
  • Precautionary savings

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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