Kuhn, Moritz (2008): Recursive equilibria in an Aiyagari style economy with permanent income shocks.
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In this paper, we prove the existence of a recursive competitive equilibrium (RCE) for an Aiyagari style economy with permanent income shocks and perpetual youth structure. We show that there exist equilibria where borrowing constraints are never binding. This allows us to establish a non-trivial lower bound on the equilibrium interest rate. To solve the individual’s problem, we present a new approach that uses lattices of consumption functions to deal with the non-compact state space and the unbounded utility function. The approach uses only the first order conditions of the problem (Euler equations). The proof is constructive and it serves as a theoretical foundation for the convergence of a policy function iteration procedure.
|Item Type:||MPRA Paper|
|Original Title:||Recursive equilibria in an Aiyagari style economy with permanent income shocks|
|Keywords:||Permanent income shocks; incomplete markets; dynamic general equilibrium; heterogeneous agents|
|Subjects:||D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets
D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D51 - Exchange and Production Economies
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E21 - Consumption; Saving; Wealth
|Depositing User:||Moritz Kuhn|
|Date Deposited:||19. Jul 2011 12:50|
|Last Modified:||13. Feb 2013 14:53|
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