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Unformatted text preview: Homework 6. Solution Graduate Macroeconomics. Viktor Tsyrennikov Question 1. Your task is to solve a model in which consumption growth process resembles that in the data and compare the models predictions about the equity premium with the data. Model environment is as follows. Uncertainly is modeled by a stochastic shock t that follows a twostate firstorder Markov process with a transition matrix . That is ( t  ) = ( t  t 1 ) ... ( 2  1 ) ( 1  ) . An agents preferences are given by U ( c ) = E [ summationdisplay t =0 t u ( c t )  ] = summationdisplay t =0 summationdisplay t t ( t  ) u ( c t ( t )) . Assume that u ( c ) = c 1 / (1 ). The agent faces the (sequential) budget constraint: c t ( t ) + summationdisplay t +1 Q t ( t +1  t ) a t +1 ( t +1 ) lessorequalslant y t ( t ) + a t ( t ) , where income of the agent is given by y t ( t ) = t ... 2 1 , t , t greaterorequalslant 1 and y ( ) = 1. Assume annual frequency. a) Construct the transition matrix and the two states to match the fol lowing data facts: 1 M1. Expected growth rate is 0.018%....
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This note was uploaded on 11/10/2011 for the course ECONOMICS 601 taught by Professor Viktortsyrennikov during the Spring '11 term at Cornell University (Engineering School).
 Spring '11
 ViktorTsyrennikov
 Macroeconomics

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