Optimal policies with heterogeneous agents: Truncation and transitions

François Le Grand and Xavier Ragot

Journal of Economic Dynamics and Control, 2023, vol. 156, issue C

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.

Keywords: Heterogeneous agents; Optimal Ramsey program; Transition approach; Truncation approach; Aggregate shock (search for similar items in EconPapers)
JEL-codes: D31 D52 E21 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Optimal Policies with Heterogeneous Agents: Truncation and Transitions (2023)
Working Paper: Optimal Policies with Heterogeneous Agents: Truncation and Transitions (2023)
Working Paper: Optimal Policies with Heterogeneous Agents: Truncation and Transitions (2023)
Working Paper: Optimal Policies with Heterogeneous Agents: Truncation and Transitions (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:156:y:2023:i:c:s0165188923001434

DOI: 10.1016/j.jedc.2023.104737

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