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Equilibrium Multiplicity in Aiyagari and Krusell-Smith

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Abstract

Repeatedly solving the Aiyagari (1994) model with random parameters, we construct hundreds of examples with multiple stationary equilibria. We never find multiplicity with risk aversion less than ≈ 1.49, depreciation less than ≈ 0.19, or income persistence less than ≈ 0.47, and multiplicity requires a disaster state for income. In cases with multiplicity, the lowest rental rate occurs near depreciation times the capital share. It is possible for the economy, without a change in fundamentals, to transition rationally from a higher-rate equilibrium to one with a lower rental rate, lower inequality, and lower welfare (for most agents). We also construct the first Krusell and Smith (1998) examples with multiple recursive competitive equilibria.

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  • Kieran Walsh & Eric Young, 2024. "Equilibrium Multiplicity in Aiyagari and Krusell-Smith," Working Papers 24-13, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:98407
    DOI: 10.26509/frbc-wp-202413
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    1. Claudio Borio, 2021. "Navigating by r*: safe or hazardous?," BIS Working Papers 982, Bank for International Settlements.
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    Cited by:

    1. Toda, Alexis Akira & Walsh, Kieran James, 2024. "Recent advances on uniqueness of competitive equilibrium," Journal of Mathematical Economics, Elsevier, vol. 113(C).

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    More about this item

    Keywords

    uniqueness; multiplicity; Bewley models; Krusell-Smith;
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    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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