ECON 702 Midterm: Krueger_702PrelimJune2017
Document Summary
1 a pure exchange economy with house- hold heterogeneity. Consider a stochastic pure exchange economy where the current state of the economy is described by st s = {s1, s2}. Event histories are denoted by st and the initial node s0 is xed. There are 2 di erent types of households with equal mass normalized to 1. Households potentially di er in their endowment stream {ei t(st)}, their initial asset position ai. 0 and their time discount factors i (0, 1). Preferences for each household over consumption allocations ci = {ci t(st)} are given by ui(ci) = T(st)u (ci t(st)). where u (. ) is strictly increasing and strictly concave: suppose that t(st) is markov with transition matrix. 1 (cid:19) where , [0, 1] are parameters. For which parameter combinations ( , ) is the associated invariant distribution (a) unique? (b) satisfy = (0. 6, 0. 4): de ne an arrow-debreu equilibrium, households can trade a full set of arrow securities.
