Abstract
This paper studies the role of non-diversified risk and risk aversion for business cycles in a model with agency frictions. We extend the Bernanke, Gertler and Gilchrist(1999) financial accelerator framework where entrepreneurs are risk neutral to the case of entrepreneurs with constant-relative-risk-aversion preferences. In the presence of risk aversion, non-diversified idiosyncratic risk stabilizes business cycle fluctuations, especially in response to financial shocks.
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