The risk-free rate in heterogeneous-agent incomplete-insurance economies
TL;DR: In this paper, the authors construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk-free asset, and calibrate the economy and characterize equilibria computationally.
About: This article is published in Journal of Economic Dynamics and Control.The article was published on 1993-09-01 and is currently open access. It has received 1293 citations till now. The article focuses on the topics: Risk-free interest rate & Interest rate.
Summary (1 min read)
2. Environment and Arrangement
- The particular arrangement considered allows each agent to smooth consumption by holding a single asset I will use the credit balance interpretation.
- An agent's decision problem will be described at a more technical level after setting down some notation.
Notation:
- The decision rule a(x;q) and the transition probabilities help define a ti-ansition function P, P: S'<SxR++ -+ [0,1].
- In the paper the dependence of the decision rules and the transition function on q will often be suppressed for notational convenience.
5. Results
- The sensitivity of excess demand to grid size, the number of grid points and the criteria for approximate market clearing has been examined.
- The corresponding annual interest rates are between 1.18% and 1.16%.
- Excess demand is not sensitive to the number of grid points, other things equal.
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Citations
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