nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒07‒25
nineteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Managing Inequality over Business Cycles: Optimal Policies with Heterogeneous Agents and Aggregate Shocks By François Le Grand; Xavier Ragot
  2. Monetary Policy and Exchange Rate Dynamics in a Behavioral Open Economy Model By Pawel Zabczyk; Marcin Kolasa; Sahil Ravgotra
  3. Inefficient Automation By Martin Beraja; Nathan Zorzi
  4. Output Gap Estimation and Monetary Policy with Imperfect Knowledge By Pei Kuang; Kaushik Mitra; Li Tang
  5. Fiscal Multipliers and Informality By Davide Furceri; Pietro Pizzuto; Emilio Colombo; Patrizio Tirelli
  6. Choosing the European Fiscal Rule By Bušs, Ginters; Grüning, Patrick; Tkačevs, Oļegs
  7. Monetary/Fiscal Policy Mix And The Size Of Government Spending Multiplier By Rym Aloui
  8. Rational housing demand bubble By Lise Clain-Chamosset-yvrard; Xavier Raurich; Thomas Seegmuller
  9. The Aging Tax on Potential Growth in Asia By Tran Quang-Thanh
  10. The Network Origin of Slow Labor Reallocation By Leonard Bocquet
  11. UNDERSTANDING CROSS-COUNTRY DIFFERENCES IN HEALTH STATUS AND EXPENDITURES By Raquel Fonseca; François Langot; Pierre-Carl Michaud; Thepthida Sopraseuth
  12. Designing Cash Transfers in the Presence of Children's Human Capital Formation By Joseph Mullins
  13. Targeting moments for calibration compared with indirect inference By Meenagh, David; Minford, Patrick; Xu, Yongdeng
  14. Search, matching and heterogeneity By Julien Pascal
  15. A structural model of liquidity in over‑the‑counter markets By Coen, Jamie; Coen, Patrick
  16. Getting to the Core: Inflation Risks Within and Across Asset Classes By Xiang Fang; Yang Liu; Nikolai Roussanov
  17. Income Inequality and Job Creation By Sebastian Doerr; Thomas Drechsel; Donggyu Lee
  18. On the Role of Learning, Human Capital, and Performance Incentives for Wages By Braz Camargo; Fabian Lange; Elena Pastorino
  19. Existence and uniqueness of solutions to the Bellman equation in stochastic dynamic programming By Rincón-Zapatero, Juan Pablo

  1. By: François Le Grand (EM - emlyon business school); Xavier Ragot (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po, ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We present a truncation theory of idiosyncratic histories for heterogeneous agent models. This method allows us to derive optimal Ramsey policies in heterogeneous agent models with aggregate shocks, in general frameworks. We use this method to characterize the optimal level of unemployment insurance over the business cycle in a production economy, with occasionally binding credit constraints.
    Keywords: Incomplete markets,Optimal policies,Heterogeneous agent models
    Date: 2020–12–01
  2. By: Pawel Zabczyk; Marcin Kolasa; Sahil Ravgotra
    Abstract: We develop an extension of the open economy New Keynesian model in which agents are boundedly rational à la Gabaix (2020). Our setup nests rational expectations (RE) as a special case and it can successfully mitigate many “puzzling” aspects of the relationship between exchange rates and interest rates. Since the model implies an uncovered interest rate parity (UIP) condition featuring behavioral expectations, our results are also consistent with recent empirical evidence showing that several UIP puzzles vanish when actual exchange rate expectations are used (instead of realizations implicitly coupled with the RE assumption). We find that cognitive discounting dampens the effects of current monetary shocks and lowers the efficacy of forward guidance (FG), but its relative importance in mitigating the so-called FG puzzle is decreasing in openness. Finally, we show that accounting for myopia exacerbates the small open economy unit-root problem, makes positive monetary spillovers more likely, and increases the persistence of net foreign assets and the real exchange rate.
    Keywords: Monetary Policy; Exchange Rates; Bounded Rationality
    Date: 2022–06–03
  3. By: Martin Beraja; Nathan Zorzi
    Abstract: How should the government respond to automation? We study this question in a heterogeneous agent model that takes worker displacement seriously. We recognize that displaced workers face two frictions in practice: reallocation is slow and borrowing is limited. We first show that these frictions result in inefficient automation. Firms fail to internalize that displaced workers have a limited ability to smooth consumption while they reallocate. We then analyze a second best problem where the government can tax automation but lacks redistributive tools to fully overcome borrowing frictions. The equilibrium is (constrained) inefficient. The government finds it optimal to slow down automation on efficiency grounds, even when it has no preference for redistribution. Using a quantitative version of our model, we find that the optimal speed of automation is considerably lower than at the laissez-faire. The optimal policy improves aggregate efficiency and achieves welfare gains of 4%. Slowing down automation achieves important gains even when the government implements generous social insurance policies.
    JEL: E2 H21 J08 J23 O33 O38
    Date: 2022–06
  4. By: Pei Kuang (University of Birmingham); Kaushik Mitra (University of Birmingham); Li Tang (Middlesex University)
    Abstract: We analyze stability of a large number of recommended output gap estimation methods and their monetary policy implications – not studied in the existing literature – in a New Keynesian model where the policymaker estimates the output gap over time. A sufficiently large response to inflation and small response to output gap estimates robustly delivers good welfare performance, irrespective of the choice of detrending methods. Across all methods, while the optimal response to inflation is similar in magnitude, that to output gap estimates varies considerably. Methods that intrinsically produce large and volatile output gap estimates are prone to self-reinforcing deflation spirals with large welfare loss; the optimal response to output gap estimates in these methods is small.
    Keywords: Detrending, Monetary policy, Expectations, Learning, Inflation, Welfare
    JEL: C18 E17 E32 E52
    Date: 2022–07
  5. By: Davide Furceri; Pietro Pizzuto; Emilio Colombo; Patrizio Tirelli
    Abstract: This paper investigates the role of informality in affecting the magnitude of the fiscal multiplier in a panel of 141 countries, using the local projections method. We find a strong negative relationship between the degree of informality and the size of the fiscal multiplier. This result holds irrespective of the levels of economic development and institutional quality and is robust to additional country characteristics such as trade, financial openness and exchange rate regime. In a two-sector new- Keynesian model, we rationalize this result by showing that fiscal shocks raise the relative price of official goods, shifting demand towards the informal sector. This reallocation effect increases with the level of informality, because a larger informal sector is associated with a stronger appreciation of relative prices in response to fiscal shocks. Thus, informality raises the size of the unofficial multiplier. A higher degree of non-separability between public and private goods also contributes to rationalize the lower multipliers in high-informality countries.
    Keywords: Fiscal multiplier; local projection methods; informality; DSGE model; TANK model.; high-informality country; role of informality; unofficial multiplier; government spending shock; investment goods producer; shadow economy variable; depreciation rate; Fiscal multipliers; Informal economy; Consumption; Global
    Date: 2022–05–06
  6. By: Bušs, Ginters; Grüning, Patrick; Tkačevs, Oļegs
    Abstract: In order to contribute to the ongoing discussions at the European Union level about the potential simplification of its fiscal framework, we evaluate the economic and public finance stabilization properties of two benchmark fiscal rules using a New Keynesian small open economy model. If these fiscal rules are implemented one at a time, having just an expenditure growth rule tends to yield more stable macroeconomic outcomes but more volatile public finances, as compared to having only a structural balance rule. Much of the quantitative differences in relative volatilities can be accounted for by using a modified public expenditure definition in the expenditure growth rule, in particular the removal of debt service payments. Strong-enough debt correction for either fiscal rule contains public debt volatility at little expense to long-run macroeconomic stability. There is also a welfare gain for households from having only an expenditure growth rule.
    Keywords: Fiscal policy; DSGE; Small open economy; Fiscal-monetary policy interaction
    JEL: E27 E32 E62 E63 F41 H63
    Date: 2022–07
  7. By: Rym Aloui (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France)
    Abstract: This paper analyzes the size of government spending multiplier in two policy mix cases: Active Monetary/Passive Fiscal policy (regime M) in the first instance and Passive Monetary/Active Fiscal policy (regime F), in the sense of Leeper (1991), in the second. I develop a New-Keynesian model where preferences are subject to external deep habits and where some households do not have access to financial markets. I show that these two specifications allow for the crowding in of private consumption in both regimes. However, the private investment falls in regime M while it rises in regime F as a response to a government spending shock. In addition, I show that the impact multiplier increases with the degree of deep habits in regime M, while it decreases in regime F. In this framework, in a low nominal interest rate environment, the government spending multiplier is not too large as vast studies show. However, I find that the global effectiveness of government spending is larger in regime F than in regime M, even though the impact multiplier is greater than unity in both regimes.
    Keywords: Wealth Effects, Government Spending Multiplier, Zero Lower Bound, Fiscal Theory of the Price Level, Monetary and Fiscal Rules, Public Debt.
    JEL: E63 E52 E62 E32
    Date: 2022
  8. By: Lise Clain-Chamosset-yvrard (UL2 - Université Lumière - Lyon 2); Xavier Raurich (University of Barcelona, Department of Economics); Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We provide a unified framework with demand for housing over the life cycle and financial frictions to analyze the existence and macroeconomic effects of rational housing bubbles. We distinguish a housing price bubble, defined as the difference between the housing market price and its fundamental value, from a housing demand bubble, which corresponds to a situation where a pure speculative housing demand exists. In an overlapping generation exchange economy, we show that no housing price bubble occurs. However, a housing demand bubble may occur, generating a boom in housing prices and a drop in the interest rate, when households face a binding borrowing constraint. Multiplicity of steady states and endogenous fluctuations can occur when credit market imperfections are moderate. These fluctuations involve transitions between equilibria with and without a housing demand bubble that generate large fluctuations in housing prices consistent with observed patterns. We finally extend the basic framework to a production economy and we show that a housing demand bubble increases the housing price, housing price to income ratio and economic growth.
    Keywords: Bubble,Housing,Self-fulfilling fluctuations
    Date: 2022–06–16
  9. By: Tran Quang-Thanh
    Abstract: Population aging is becoming a prominent issue in Asia, especially for developing countries where demographic changes have asserted a downward pressure on the rate of growth. This paper refers to such potential unwanted effects as an "aging tax" and analytically examines them from a neoclassical perspective, using a Diamond-type overlapping generations model with endogenous retirement, survival rate, and old worker productivity. Based on this setup, negative impacts exist if too many old workers that are sufficiently unproductive choose to defer retirement under the aging pressure, which drains resources from future generations. Numerical simulations show that an aging tax can reduce the potential per capita growth rate (technologyadjusted) by up to 0.12 percentage points annually for some countries in Asia. Our results highlight that countries with sufficiently large labor shares (due to a high ratio of self-employment or a manual labor-centric production) and inadequate educational attainment are potentially the most sensitive and vulnerable to population aging.
    Date: 2022–03
  10. By: Leonard Bocquet (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: What explains slow worker reallocation after trade or technological shocks? In this paper, I explore the idea that imperfect skill transferability constrains the reallocation of workers between occupations. I model these frictions as forming a network (the "occupational network"), whose nodes are occupations and whose edges represent the possible occupational transitions. I show that the structure of the occupational network matters for the speed of worker reallocation and I make two contributions. First, I find that this network is very sparse, hinting at large frictions to occupational mobility, and that there exists central bottleneck occupations which can block the reallocation process. Second, I extend the search and matching model of the labor market with an occupational network. I find that asymmetric shocks can generate transition dynamics which are two orders of magnitude slower than in the standard model. Moreover, I show that the intensity of network bottlenecks is a key determinant of slow worker reallocation dynamics after asymmetric shocks. In other words, central occupations have a granular effect on worker reallocation speed.
    Date: 2022–06
  11. By: Raquel Fonseca (UQAM - Université du Québec à Montréal = University of Québec in Montréal, CIRANO - Centre interuniversitaire de recherche en analyse des organisations - UQAM - Université du Québec à Montréal = University of Québec in Montréal); François Langot (UM - Le Mans Université, PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Pierre-Carl Michaud (HEC Montréal - HEC Montréal, NBER - National Bureau of Economic Research [New York] - NBER - The National Bureau of Economic Research); Thepthida Sopraseuth (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)
    Abstract: Using a general equilibrium heterogeneous agent model featuring health production, we quantify the relative contribution of price distortions in the health market, TFP and other health risks in explaining cross-country differences in health expenditure (as a share of GDP) and health status. Estimated parameters reveal a substantial price wedge that explains at most 20% of the difference in health spending (as a share of GDP) and 30% of the difference in health status between Europe and the U.S. We estimate a one percentage point negative impact on the life-time cost-of-living of Americans from higher prices due to inefficiencies.
    Date: 2022–05–25
  12. By: Joseph Mullins (University of Western Ontario)
    Abstract: This paper finds that accounting for the human capital development of children has a quantitatively large effect on the true costs and benefits of providing cash assistance to single mothers in the United States. A dynamic model of work, welfare participation, and parental investment in children introduces a formal apparatus for calculating costs and benefits when individuals respond to incentives. The model provides a tractable outcome equation in which a policy's effect on child skills can be understood through its impact on two economic resources in the household--time and money--and the share of each resource as factors in the production of skills. These key causal parameters are cleanly identified by policy variation through the 1990s. The model also admits simple and interpretable formulae for optimal nonlinear transfers in the style of Mirrlees (1971), with novel features arising when child skill formation is accounted for. Using a broadly conservative empirical strategy, estimates imply that optimal transfers are about 20% more generous than the US benchmark, and shaped very differently. In contrast to current policies, the optimal policy discourages labor supply at the bottom of the income distribution due to the costly estimated impacts of work on child development. The finding underscores the importance of reconciling results in the literature on the developmental effects of maternal employment. Finally, a counterfactual model exercise suggests that changes to the welfare and tax environment after 1996 had negative average effects both on maternal welfare and child skill outcomes, with a significant degree of redistribution across latent dimensions.
    Keywords: welfare participation, parental investments, cost-benefit analysis
    JEL: J24 J13 E24
    Date: 2022–07
  13. By: Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Xu, Yongdeng (Cardiff Business School)
    Abstract: A common practice in estimating parameters in DSGE models is to find a set that when simulated gets close to an average of certain data moments; the model's simulated performance for other moments is then compared to the data for these as an informal test of the model. We call this procedure informal Indirect Inference, III. By contrast what we call Formal Indirect Inference, FII, chooses a set of moments as the auxiliary model and computes the Wald statistic for the joint distribution of these moments according to the structural DSGE model; it tests the model according to the probability of obtaining the data moments. The FII estimator then chooses structural parameters that maximise this probability. We show in this note via Monte Carlo experiments that the FII estimator has low bias in small samples, whereas the III estimator has much higher bias. It follows that models estimated by III will typically also be rejected by formal indirect inference tests.
    Keywords: Moments, Indirect Inference
    JEL: C12 C32 C52
    Date: 2022–07
  14. By: Julien Pascal (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This thesis consists of three chapters that study frictional markets. The first chapter asks the question of what are the sources of labor income shocks, with a special focus on the scarring effects of recessions. I develop and estimate a dynamic frictional model of the labor market with heterogeneous workers and firms. The economic contribution of the first chapter is to show that sorting — the degree of complementarity between firms and workers — is a key component of idiosyncratic labor income risk. A technical contribution is to show that, while the determination of wage is a priori complex in a dynamic search model with heterogeneity, an efficient and robust algorithm exists. The second chapter explores to what extent a localized drop in commuting costs may lead to an increase in local employment. This chapter makes use of a discontinuity introduced by a French reform in September 2015 in the Paris metropolitan area. I find that cities that enjoyed a decrease in commuting costs experienced an increase in local employment. While the first two chapters analyze the labor market, the last chapter focuses on another key frictional market: the housing market. Little is known on the rental market because there are no comprehensive datasets recording rental agreements. To circumvent this issue, I collected data on rental ads in the Paris metropolitan area using web scraping techniques for a period of three months. I show that the rental housing market is well described by a directed search model. However, a non-negligible proportion of landlords use a two-step pricing approach when setting the rent, which raises interesting welfare and modeling questions.
    Abstract: Cette thèse est constituée de trois chapitres. Le dénominateur commun de ces chapitres est l'analyse des marchés frictionnels, c'est à dire les marchés pour lesquels le processus de tâtonnement walrasien ne permet pas à l'offre et à la demande de s'équilibrer instantanément. Le premier chapitre s'intéresse aux origines des fluctuations du revenu du travail au cours du cycle économique. En particulier, ce premier chapitre revisite la question de la persistance des chocs de revenu du travail, aussi appelée l'effet scarification des récessions. Je revisite la question des fluctuations du revenu du travail au cours du cycle en développant et en estimant un modèle d'appariement du marché du travail, avec une incertitude sur le niveau de la productivité agrégée des travailleurs. Le second chapitre analyse le lien causal entre une baisse du coût des transports en commun et les dynamiques d'emploi local. Mon argumentation se base sur la discontinuité créée par la réforme de la tarification du forfait Navigo en septembre 2015. Cette réforme a égalisé le coût des transports en commun en Île-de-France. J'estime l'impact causal d'une baisse du coûts des transports en commun sur les dynamiques d'emploi local en utilisant une méthode des doubles différences. Le troisième chapitre se focalise sur un autre marché frictionnel d'importance capitale : le marché immobilier. L'analyse de ce chapitre repose sur une base de données collectées via des méthodes de web scraping. Combinant l'information sur les logements et les locataires potentiels, je montre que le marché locatif de la région parisienne est bien décrit par un modèle d'appariement directionnel.
    Keywords: Scaring effects of recessions,Employment dynamics,Rental housing market,Directed search,Effet scarification,Dynamiques d'emploi,Marché locatif,Recherche directionnelle
    Date: 2020–06–30
  15. By: Coen, Jamie (Bank of England); Coen, Patrick (Toulouse School of Economics)
    Abstract: We study how firm heterogeneity determines liquidity in over‑the‑counter markets. Using a rich data set on trading in the secondary market for sterling corporate bonds, we build and estimate a flexible model of search and trading in which firms have heterogeneous search costs. We show that the 8% most active traders supply as much liquidity as the remaining 92%. Liquidity is thus vulnerable to shocks to these firms: if the 4% most active traders stop trading, liquidity falls by over 60%. Bank capital regulation reduces the willingness of these active traders to hold assets and thus reduces liquidity. However, trader search, holdings and intermediation respond endogenously to reduce the welfare costs of regulation by 30%. These costs are greater in a stress, when these margins of adjustment are constrained. The introduction of trading platforms, which homogenise the ability of traders to trade frequently, improves aggregate welfare but harms the most active traders who currently profit from supplying liquidity.
    Keywords: Liquidity; over‑the‑counter markets; financial intermediation.
    JEL: D83 G12 L51
    Date: 2022–05–13
  16. By: Xiang Fang; Yang Liu; Nikolai Roussanov
    Abstract: Do “real” assets protect against inflation? Core inflation betas of stocks are negative while energy betas are positive; currencies, commodities, and real estate also mostly hedge against energy inflation but not core. These hedging properties are reflected in the prices of inflation risks: only core inflation carries a negative risk premium, and its magnitude is consistent both within and across asset classes, uniquely among macroeconomic risk factors. While high core inflation tends to be followed by low real output, consumption, and dividend payouts, it impacts asset prices through both cash-flow and discount rate channels. The relative contribution of core and energy changes over time, helping explain the time-varying correlation between stock and bond returns. A two-sector New Keynesian model qualitatively accounts for these facts and implies that the changing stock-bond correlation can be attributed to the shifting importance of supply and demand shocks in driving energy inflation over time.
    JEL: E31 E44 E5 F31 G12 G15
    Date: 2022–06
  17. By: Sebastian Doerr; Thomas Drechsel; Donggyu Lee
    Abstract: This paper shows that changes in top income shares affect job creation at firms of different sizes. High-income households save relatively more in stocks and bonds, and relatively less in bank deposits. We propose that a higher share of income accruing to top earners therefore channels funds to large firms, but tightens financing conditions for small, bank-dependent firms. In turn, small firms create fewer jobs than large firms. Exploiting variation in top incomes across U.S. states and an instrumental variable strategy, we estimate that a 10 percentage point (p.p.) increase in the income share of the top 10 percent reduces the net job creation rate of small firms by 2.5 p.p. relative to large firms. Very small firms and those in bank-dependent industries are most affected. Experiments in a quantitative macro model show that growing top incomes account for 16 percent of the overall decline in the employment share of small firms since 1980. The model also reveals that not taking into account the link between inequality and job creation understates the welfare effects of income redistribution.
    Keywords: income inequality; job creation; small businesses; bank lending; household heterogeneity; financial frictions
    JEL: D22 D31 E44 L25
    Date: 2022–06–01
  18. By: Braz Camargo; Fabian Lange; Elena Pastorino
    Abstract: Performance pay in general amounts to only a small fraction of total pay. In this paper, we show that performance pay is nevertheless important for the level and dynamics of wages over the life cycle because of the incentives it indirectly provides for human capital acquisition and because of its impact on the variability of total pay. We articulate this argument in the context of a model that combines three key mechanisms for wage growth and dispersion: employer learning about workers’ ability, human capital acquisition, and performance incentives. We use this model to account for the experience profile of wages, their dispersion, and their composition in terms of fixed and variable (performance) pay. The model admits an analytical decomposition of performance pay into four terms that capture (i) the trade-off between risk and incentives characteristic of settings of moral hazard; (ii) the insurance that firms provide against the wage risk due to the uncertainty about ability; (iii) incentives for effort arising from this uncertainty (career concerns); and (iv) incentives for effort generated by the prospect of human capital acquisition. We prove the model is identified under standard assumptions. Despite its parsimony, the model fits the data very well, including the empirical finding that performance pay as a share of total pay first increases and then decreases with experience. This feature of performance pay, which we are the first to document, runs contrary to the prediction of standard models of performance incentives that the ratio of performance pay to total pay increases with experience, especially at the end of the life cycle. Our estimates imply that effort to produce output augments human capital. Also, human capital acquisition and insurance against uncertainty about ability are quantitatively the main determinants of performance pay. Career-concerns incentives, on which the theoretical literature has focused, and the strength of the contemporaneous trade-off between risk and incentives—the primary determinant of variable pay in static moral-hazard models—are instead much less relevant. Importantly, we find that through the cumulative impact of effort on the job on human capital acquisition and the contribution of variable pay to the variance of total pay, performance incentives are a crucial source of wage growth and dispersion over the life cycle.
    JEL: D8 D86 J24 J3 J31 J33 J41 J44
    Date: 2022–06
  19. By: Rincón-Zapatero, Juan Pablo
    Abstract: In this paper we develop a general framework to analyze stochastic dynamic optimization problems in discrete time. We obtain new results of the existence and uniqueness of solutions to the Bellman equation through a general xed point theorem that generalizes known results for Banach contractions and local contractions. We study an endogenous growth model as well as the Lucas asset pricing model in an exchange economy, signicantly expanding their range of applicability.
    Keywords: Stochastic Dynamic Programming; Contraction Mapping; Bellman Equation; Value Function; Endogenous Growth; Asset Pricing Model
    Date: 2022–06–29

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