Huggett Economies with Multiple Stationary Equilibria

24 Pages Posted: 15 Mar 2017 Last revised: 6 Nov 2017

See all articles by Alexis Akira Toda

Alexis Akira Toda

University of California, San Diego (UCSD) - Department of Economics

Date Written: August 30, 2017

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

JEL Classification: C62, D52, D58, E21

Suggested Citation

Toda, Alexis Akira, Huggett Economies with Multiple Stationary Equilibria (August 30, 2017). Journal of Economic Dynamics and Control, Vol. 84, 2017, Available at SSRN: https://ssrn.com/abstract=2932314 or http://dx.doi.org/10.2139/ssrn.2932314

Alexis Akira Toda (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
Mail Code 0508
La Jolla, CA 92093-0508
United States

HOME PAGE: http://https://sites.google.com/site/aatoda111/

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