Another Look at the Distribution of Income and Wealth in the Macroeconomy

Abstract

The paper is concerned with the class of models introduced by Bewley (1977, 1980, 1983) and with their extensions to models with shared risk and production. It was prompted by the accidental discovery that, if made more precise, the common computational strategy for such models fails to locate the equilibrium in a well known benchmark study. By working in the dual space and utilizing the special regrouping-across-time of the first order Lagrange conditions, introduced by Dumas and Lyasoff (2012), the paper develops a novel description of the law of motion of the cross-sectional distribution of households and extends the algorithm proposed in ibid. to finite time horizon economies with infinitely many agents, common shocks, and production. The new algorithm avoids the need to re-interpret the distribution of households as the probability distribution of any particular Markovian state and is tested in two well known benchmark economies.

Keywords: General Equilibrium, Incomplete Markets, Heterogeneous Agent Models, Analytical Methods, Numerical Methods

JEL Classification: D52, C68, D58, E21