Recursive equilibrium in Krusell and Smith (1998)

This paper uses the tools developed in the literature on dynamically incomplete markets with finite agents to study the large economy with a continuum of agents and both aggregate and idiosyncratic shocks in Krusell and Smith (1998). It establishes the existence of sequential competitive equilibrium...

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Bibliographic Details
Published in:Journal of economic theory Vol. 186; p. 104978
Main Author: Cao, Dan
Format: Journal Article
Language:English
Published: Elsevier Inc 01.03.2020
Subjects:
Aggregate and Idiosyncratic Shocks
Heterogeneous Agents
Incomplete Markets
Kakutani-Fan-Glicksberg Fixed Point Theorems
Recursive Equilibrium
Stationarity and Ergodicity
D5
Aggregate and Idiosyncratic Shocks
Heterogeneous Agents
Recursive Equilibrium
Stationarity and Ergodicity
E1
E2
E3
Incomplete Markets
D3
Kakutani-Fan-Glicksberg Fixed Point Theorems
ISSN:0022-0531, 1095-7235
Online Access:Get full text
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Summary:This paper uses the tools developed in the literature on dynamically incomplete markets with finite agents to study the large economy with a continuum of agents and both aggregate and idiosyncratic shocks in Krusell and Smith (1998). It establishes the existence of sequential competitive equilibrium, generalized recursive equilibrium, recursive equilibrium with an extended-state space, and characterizes several important properties of the equilibrium variables. The equilibrium process admits an ergodic measure, which enables the application of the ergodic theorem for simulating and calibrating the model. Without aggregate shocks, the existence and some characterization results carry over to economies with only idiosyncratic shocks such as Huggett (1997)'s economy. However, the existence of recursive equilibrium with the natural minimal state space in Krusell and Smith's economy remains elusive, as in finite-agent incomplete markets economies.
ISSN:0022-0531
1095-7235
DOI:10.1016/j.jet.2019.104978