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Optimal policies with heterogeneous agents: Truncation and transitions

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  • Le Grand, François
  • Ragot, Xavier

Abstract

We compare two approaches in their ability to solve for optimal Ramsey policies in heterogeneous-agent models, considering the optimal provision of a public good. First, the “transition” approach makes the problem tractable by assuming a constant path for the planner's instruments. Second, the “truncation” approach uses a Lagrangian technique, solving the Ramsey problem of a finite state space model that approximates the full model. The truncation approach is shown to compute quantitatively accurate estimates of the actual values of the planner's instruments, whereas a time-inconsistency issue is found to affect the transition approach.

Suggested Citation

  • Le Grand, François & Ragot, Xavier, 2023. "Optimal policies with heterogeneous agents: Truncation and transitions," Journal of Economic Dynamics and Control, Elsevier, vol. 156(C).
    • Handle: RePEc:eee:dyncon:v:156:y:2023:i:c:s0165188923001434
    DOI: 10.1016/j.jedc.2023.104737
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    More about this item

    Keywords

    Heterogeneous agents; Optimal Ramsey program; Transition approach; Truncation approach; Aggregate shock;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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