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The Optimum Quantity of Debt: Technical Appendix

Author

Listed:
  • 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.

Suggested Citation

  • S. Rao Aiyagari & Ellen R. McGrattan, 2003. "The Optimum Quantity of Debt: Technical Appendix," Annals of Economics and Finance, Society for AEF, vol. 4(1), pages 193-217, May.
    • Handle: RePEc:cuf:journl:y:2003:v:4:i:1:p:193-217
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    References listed on IDEAS

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    More about this item

    Keywords

    Finite element method; Optimal debt;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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