Existence of Recursive Constrained Optima in the Heterogeneous Agent Neoclassical Growth Model

32 Pages Posted: 1 Aug 2017 Last revised: 31 Mar 2019

See all articles by Akshay Shanker

Akshay Shanker

Australian National University (ANU) - Crawford School of Public Policy

Date Written: November 15, 2017

Abstract

Recently, macroeconomists have begun to study optimal policy in heterogeneous agent models with incomplete markets, or Aiyagari-Huggett models. A natural way to formulate an optimal policy problem in the model is by using a constrained planner (Davila , 2012), a planner who cannot complete markets but must improve welfare subject to agents' budget constraints. Despite the relevance of the constrained planner to understanding optimal macroeconomic policy, existence of constrained optima has not been verified. This paper proves existence of recursive constrained optima in the standard Aiyagari-Huggett model. A key challenge the proof overcomes is non-compactness of feasibility correspondences in the constrained planner's dynamic optimisation problem, brought on by the infinite dimensional structure of the Aiyagari-Huggett model.

Keywords: Neoclassical Growth Models, Incomplete Markets, Heterogeneous Agents, Constrained Planner, Dynamic Optimisation, Recursive Policies, Infinite Dimensional State-Space

Suggested Citation

Shanker, Akshay, Existence of Recursive Constrained Optima in the Heterogeneous Agent Neoclassical Growth Model (November 15, 2017). Available at SSRN: https://ssrn.com/abstract=3011662 or http://dx.doi.org/10.2139/ssrn.3011662

Akshay Shanker (Contact Author)

Australian National University (ANU) - Crawford School of Public Policy ( email )

ANU College of Asia and the Pacific
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

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