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The Optimum Quantity of Debt: Technical Appendix

  • S. Rao Aiyagari

    (Research Department, Federal Reserve Bank of Minneapolis)

  • Ellen R. McGrattan

    (Research Department, Federal Reserve Bank of Minneapolis)

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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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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  1. Mehrling, Perry, 1995. "A note on the optimum quantity of money," Journal of Mathematical Economics, Elsevier, vol. 24(3), pages 249-258.
  2. S. Rao Aiyagari & Ellen R. McGrattan, 1994. "The optimal quantity of debt," Working Papers 538, Federal Reserve Bank of Minneapolis.
  3. 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, June.
  4. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  5. Ellen R. McGrattan, 1993. "Solving the stochastic growth model with a finite element method," Staff Report 164, Federal Reserve Bank of Minneapolis.
  6. Jappelli, Tullio & Pagano, Marco, 1999. "The Welfare Effects of Liquidity Constraints," Oxford Economic Papers, Oxford University Press, vol. 51(3), pages 410-30, July.
  7. Javier Diaz-Gimenez & Edward C. Prescott & Terry J. Fitzgerald & Fernando Alvarez, 1992. "Banking in computable general equilibrium economies," Staff Report 153, Federal Reserve Bank of Minneapolis.
  8. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  9. 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.
  10. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
  11. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  12. Timothy J. Kehoe & David K. Levine & Michael Woodford, 1992. "The Optimum Quantity of Money Revisited," Levine's Working Paper Archive 2035, David K. Levine.
  13. 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.
  14. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  15. 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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  17. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  18. Fernando Alvarez & Terry J. Fitzgerald, 1992. "Banking in computable general equilibrium economies: technical appendices I and II," Staff Report 155, Federal Reserve Bank of Minneapolis.
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