Heterogeneous Agents Economies with Capital: Model Development and Applications

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Previously developed methods to compute equilibria for stochastic overlapping generations economies where agents live a large number of periods will be applied to address several questions. Among them are the behavior of asset prices and the distribution of risks across agents in these type of economies. Another application is to investigate the implications of changes in the age structure of the population on intertemporal prices, and on the rate of capital accumulation. Finally, a quantitative assessment of the patterns of international borrowing and lending due to differences in the demographic structure of nations will allow an evaluation of the nature of the external deficit. The study will also develop a method suitable to quantitatively address heterogeneous, infinitely lived agents economies with capital, ideosyncratic and economy-wide shocks to productivity, and liquidity constraints. The development of this method will allow explicit consideration of many issues. Among them are: checking the robustness of the findings of real business cycle research to environments with pervasive liquidity constraints, and studying the behavior of different wealth and income groups during the business cycle, and the differential volatility of hours worked across skill groups. This project addresses many important issues regarding computable general equilibrium models that need to be better understood. The methods developed can be used to explore issues related to aging and savings, and the distribution of workers. This work will provide the crucial base upon which important policy issues can be addressed in the future.