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Optimal Policies with Heterogeneous Agents: Truncation and Transitions

45 Pages Posted: 27 Feb 2023 Publication Status: Published

See all articles by Xavier Ragot

Xavier Ragot

Sciences Po

François Le Grand

affiliation not provided to SSRN

Abstract

We compare methods to solve for optimal policies in heterogeneous agent-models with and without aggregate shocks, considering the optimal provision of a public good in a heterogeneous-agent economy. We first use a method based on transitions that we modify to neutralize the effect of the initial distribution. Second, we consider a truncation method combining a Lagrangian approach and an improved truncation procedure that takes advantage of the restrictions imposed by the first-order conditions of the Ramsey problem. The truncation method provides quantitatively accurate estimates of the value of the planner’s instruments, whereas a time-inconsistency issue affects the transition method. We also report a number of quantitative checks, both in time-0 and timeless perspectives, and both with and without aggregate risk.

Keywords: heterogeneous agents, optimal Ramsey program, transition method, truncation method, aggregate shock

Suggested Citation

Ragot, Xavier and Le Grand, François, Optimal Policies with Heterogeneous Agents: Truncation and Transitions. Available at SSRN: https://ssrn.com/abstract=4371888 or http://dx.doi.org/10.2139/ssrn.4371888

Xavier Ragot (Contact Author)

Sciences Po ( email )

28 Rue des Saint-Peres
Paris, Paris 75006
France

François Le Grand

affiliation not provided to SSRN

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