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Huggett economies with multiple stationary equilibria

Alexis Akira Toda ()

Journal of Economic Dynamics and Control, 2017, vol. 84, issue C, 77-90

Abstract: I obtain a closed-form solution to a Huggett economy with constant absolute risk aversion (CARA) utility when the vector of individual state variables follows a VAR(1) process with an arbitrary shock distribution. The stationary equilibrium is unique if the income process is AR(1), but not necessarily so otherwise. With Gaussian shocks, I provide general sufficient conditions for the existence of at least three equilibria when the income process is either ARMA(1,1), AR(2), or has a persistent-transitory (PT) representation with negatively correlated shocks. The possibility of multiple equilibria calls for caution in comparative statics exercises and policy analyses using heterogeneous-agent models. As an illustration I provide an example in which the welfare implication of changing the income risk goes in opposite directions depending on the choice of equilibrium.

Keywords: CARA utility; Income fluctuation problem; Persistent-transitory representation (search for similar items in EconPapers)
Date: 2017
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