Neoclassical Growth Transition Dynamics with One-Sided Commitment by Dirk Krueger

Join us for this weeks Macroeconomics Research Seminar, Summer Term 2022

Dirk Krueger from the Department of Economics, at University of Pennsylvania will present their research on Neoclassical Growth Transition Dynamics with One-Sided Commitment.

Abstract

This paper characterizes the transition dynamics of a continuous-time neoclassical production economy with capital accumulation in which households face idiosyncratic income risk. Insurance companies operating in perfectly competitive markets offer long-term insurance contracts and can commit to future contractual obligations, whereas households cannot. Therefore, the equilibrium features imperfect insurance and a non-degenerate cross-sectional consumption distribution. When household labor productivity takes two values, one of which is zero, and the utility function is logarithmic, we show that the transition dynamics induced by unexpected positive or negative technology shocks, including the evolution of the consumption distribution, can be calculated in closed form, as long as the initial deviation from the steady state is not too large. This is in contrast to both the standard representative agent neoclassical growth model as well as Bewley (1986) style models with uninsurable idiosyncratic income risk. Thus the paper provides an analytically tractable alternative to the standard incomplete markets general equilibrium model developed in Aiyagari (1994) by retaining its physical structure, but substituting the assumed incomplete asset markets structure with one in which limits to consumption insurance emerge endogenously, as in the macroeconomic literature on limited commitment.

This seminar will be held at Colchester campus in CTC.101. This event is open to all levels of study and is also open to the public, but will also be held on Zoom.

To register your place, please contact the seminar organisers.

This event is part of the Macroeconomics Research Seminar Series.