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Oxford Bulletin of Economics and Statistics (2022)
Matsuoka Hideaki
By Toda Alexis Akira
Journal of Economic Dynamics and Control (2017)
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.
Toda A. (2017) Huggett Economies with Multiple Stationary Equilibria. Journal of Economic Dynamics and Control, 84, 77-90.