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Applying Negishi's method to stochastic models with overlapping generations

Felix Kubler () and Johannes Brumm
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Johannes Brumm: University of Zurich

No 1352, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper we develop a Negishi approach to characterize recursive equilibria in stochastic models with overlapping generations. When competitive equilibria are Pareto-optimal, using Negishi-weights as a co-state variable has three major computational advantages over the standard approach of using the natural state: First, the endogenous state space is a unit simplex and thus easy to handle. Second, the number of unknown functions characterizing equilibrium dynamics is orders of magnitude smaller. Third, approximation errors have a compelling economic interpretation. Our main contribution is to show that the Negishi approach extends naturally to models with borrowing-constraints and incomplete financial markets where the welfare theorems fail. Many of the computational advantages carry over to this setting. We derive sufficient conditions for the existence of Markov equilibria in the complete markets model as well as for models with incomplete markets and borrowing constraints.

Date: 2013
New Economics Papers: this item is included in nep-dge and nep-ger
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