Money with Idiosyncratic Uninsurable Returns to Capital

helpful discussions and to three anonymous referees for helpful comments. Also, I am indebted to the assistance of Sonia Laszlo. RUNNING TITLE: Money with Idiosyncratic Returns. 2 ABSTRACT This paper extends the income fluctuations problem to an economy with endogenous growth. Individuals, instead of owning an stream of endowments, accumulate capital with an investment irreversibility constraint and face uninsurable idiosyncratic risks to the return to capital. Money provides both a risk diversification and a liquidity role. Balanced growth paths exist despite the increasing dispersion of the wealth distribution. The return to money cannot be equated to the social return to capital unless the government owns the entire capital stock with idiosyncratic risk, and it is capable of operating this stock as efficiently as private agents can.