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The Optimum Quantity of Debt: Technical Appendix

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  • S. Rao Aiyagari

    (Research Department, Federal Reserve Bank of Minneapolis)

  • Ellen R. McGrattan

    (Research Department, Federal Reserve Bank of Minneapolis)

Abstract

We describe the numerical method used to compute equilibria in the economies studied by Aiyagari and McGrattan, The Optimum Quantity of Debt (Journal of Monetary Economics 1998). These economies have a large number of infinitely lived households whose saving behavior is influenced by precautionary saving motives and borrowing constraints. We apply the finite element method to compute households¡¯ saving decisions and to compute the distribution of asset holdings. To verify that the method works well for our problems, we apply them to some related test problems with known solutions.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 4 (2003)
Issue (Month): 1 (May)
Pages: 193-217

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Handle: RePEc:cuf:journl:y:2003:v:4:i:1:p:193-217

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Keywords: Finite element method; Optimal debt;

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References

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  1. Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-42, February.
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  3. S. Rao Aiyagari & Ellen R. McGrattan, 1994. "The optimal quantity of debt," Working Papers 538, Federal Reserve Bank of Minneapolis.
  4. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  5. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
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  7. Laitner, John P, 1979. "Bequests, Golden-age Capital Accumulation and Government Debt," Economica, London School of Economics and Political Science, vol. 46(184), pages 403-14, November.
  8. Jappelli, Tullio & Pagano, Marco, 1995. "The Welfare Effects of Liquidity Constraints," CEPR Discussion Papers 1108, C.E.P.R. Discussion Papers.
  9. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  10. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  11. McGrattan, Ellen R., 1996. "Solving the stochastic growth model with a finite element method," Journal of Economic Dynamics and Control, Elsevier, vol. 20(1-3), pages 19-42.
  12. Imrohoroglu, Ayse, 1992. "The welfare cost of inflation under imperfect insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 79-91, January.
  13. Timothy J. Kehoe & David K. Levine & Michael Woodford, 1990. "The optimum quantity of money revisited," Working Papers 404, Federal Reserve Bank of Minneapolis.
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  15. Mehrling, Perry, 1995. "A note on the optimum quantity of money," Journal of Mathematical Economics, Elsevier, vol. 24(3), pages 249-258.
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  17. Partha Dasgupta & Douglas Gale & Oliver Hart & Eric Maskin (ed.), 1992. "Economic Analysis of Markets and Games: Essays in Honor of Frank Hahn," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262541599, December.
  18. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
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Cited by:
  1. Miguel Viegas & Ana Paula Ribeiro, 2011. "Welfare-improving Government Behaviour and Inequality - Inspection Using a Heterogeneous-agent Model," CEF.UP Working Papers 1103, Universidade do Porto, Faculdade de Economia do Porto.
  2. Wang, Gaowang, 2011. "Time Preference and Interest Rate in a dynamic general Equilibrium Model," MPRA Paper 34063, University Library of Munich, Germany.
  3. Wang, Gaowang & Zou, Heng-fu, 2011. "Mercantilism, Foreign Asset Accumulation and Macroeconomic Policy," MPRA Paper 34519, University Library of Munich, Germany.
  4. Viegas, Miguel & Ribeiro, Ana Paula, 2013. "Welfare-improving government behavior and inequality in a heterogeneous agents model," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 146-160.

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