Exactly Solved Economies with Heterogeneity
25 Pages Posted: 8 Feb 2019 Last revised: 21 Mar 2019
Date Written: January 17, 2019
We propose a novel modeling approach for general equilibrium economies with persistent heterogeneity that yields exact solutions. This is an important advancement relative to previous approaches where approximations are necessary, either by summarizing the distributional state space with a fixed number of moments or, alternatively, by perturbing the problem around a given fixed point for which the solution is known. As our approach does not impose any restriction on the shape of the state variable distribution, it can also be used to evaluate the conditions under which previous solution methods are likely to succeed.
Keywords: general equilibrium models, persistent heterogeneity, exact solutions, occasionally binding constraints, non-linearities
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