Huggett Economies with Multiple Stationary Equilibria

Toda, Alexis Akira (2017): Huggett Economies with Multiple Stationary Equilibria.

Abstract

I obtain a closed-form solution to a Huggett economy with CARA utility when the vector of individual state variables follows a VAR(1) process with an arbitrary shock distribution. The stationary equilibrium is unique if the income process is AR(1), but not necessarily so otherwise. With Gaussian shocks, I provide general sufficient conditions for the existence of at least three equilibria when the income process is either ARMA(1,1), AR(2), or has a persistent-transitory (PT) representation with negatively correlated shocks. The possibility of multiple equilibria calls for caution in comparative statics exercises and policy analyses using heterogeneous-agent models.

• Item Type: MPRA Paper
• Language: English
• Keywords: CARA utility, income fluctuation problem, persistent-transitory representation
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C62 - Existence and Stability Conditions of Equilibrium; D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets; D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D58 - Computable and Other Applied General Equilibrium Models; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth

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