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Optimal Policies with Heterogeneous Agents: Truncation and Transitions

Author

Listed:
  • Xavier Ragot

    (Sciences Po - Sciences Po)

  • François Legrand

    (ESC [Rennes] - ESC Rennes School of Business)

Abstract

We compare two approaches in their ability to solve for optimal Ramsey policies in heterogeneous-agent models, considering the optimal provision of a public good. First, the "transition" approach makes the problem tractable by assuming a constant path for the planner's instruments. Second, the "truncation" approach uses a Lagrangian technique, solving the Ramsey problem of a finite state space model that approximates the full model. The truncation approach is shown to compute quantitatively accurate estimates of the actual values of the planner's instruments, whereas a time-inconsistency issue is found to affect the transition approach.

Suggested Citation

  • Xavier Ragot & François Legrand, 2023. "Optimal Policies with Heterogeneous Agents: Truncation and Transitions," Post-Print hal-04384031, HAL.
  • Handle: RePEc:hal:journl:hal-04384031
    DOI: 10.1016/j.jedc.2023.104737
    Note: View the original document on HAL open archive server: https://hal.science/hal-04384031
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    References listed on IDEAS

    as
    1. Den Haan, Wouter J., 2010. "Assessing the accuracy of the aggregate law of motion in models with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 79-99, January.
    2. Adrien Auclert & Bence Bardóczy & Matthew Rognlie & Ludwig Straub, 2021. "Using the Sequence‐Space Jacobian to Solve and Estimate Heterogeneous‐Agent Models," Econometrica, Econometric Society, vol. 89(5), pages 2375-2408, September.
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    More about this item

    Keywords

    Heterogeneous agents optimal Ramsey program transition approach truncation approach aggregate shock D31 D52 E21; Heterogeneous agents; optimal Ramsey program; transition approach; truncation approach; aggregate shock D31; D52; E21;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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