Equilibrium Multiplicity in Aiyagari and Krusell-Smith

Kieran Walsh and Eric Young

No 24-13, Working Papers from Federal Reserve Bank of Cleveland

Abstract: Repeatedly solving the Aiyagari (1994) model with random parameters, we construct hundreds of examples with multiple stationary equilibria. We never find multiplicity with risk aversion less than ≈ 1.49, depreciation less than ≈ 0.19, or income persistence less than ≈ 0.47, and multiplicity requires a disaster state for income. In cases with multiplicity, the lowest rental rate occurs near depreciation times the capital share. It is possible for the economy, without a change in fundamentals, to transition rationally from a higher-rate equilibrium to one with a lower rental rate, lower inequality, and lower welfare (for most agents). We also construct the first Krusell and Smith (1998) examples with multiple recursive competitive equilibria.

Keywords: uniqueness; multiplicity; Bewley models; Krusell-Smith (search for similar items in EconPapers)
JEL-codes: C6 D5 E1 (search for similar items in EconPapers)
Pages: 39
Date: 2024-06-20
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (1)

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DOI: 10.26509/frbc-wp-202413

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