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# HW6 - Homework 6 Econ 606 Jonathan Heathcote Due Tuesday...

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Homework 6, Econ 606 Jonathan Heathcote Due Tuesday April 18th Consider the Huggett (1993) economy. Use his benchmark parameter values: period length is two months, β = 0 . 96 (annual basis) coe cient of relative risk- aversion σ = 1 . 5 , e h = 1 , e l = 0 . 1 , π ( e h | e h ) = 0 . 925 , π ( e h | e l ) = 0 . 5 Consider a stationary equilibrium. 1. In this equilibrium what is average income, and what is the average dura- tion of an unemployment spell? Set the borrowing constraint equal to one year’s average income. Con- struct an equally-spaced grid on asset holdings, with a maximum value equal to 3 × average income. Let the number of grid points N = 20 . Suppose the interest rate r = 3 . 4% (annual basis) 2. Use the Euler equation iteration procedure we outined to solve for optimal decision rules across the grid. 1 3. Imagine one agent, who starts out with zero assets and the high endow- ment. Simulate the evolution of the agent’s wealth, income and consump- tion for 10 , 000 periods, each period drawing an endowment according to the Markov process described above (use a random number generator).

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HW6 - Homework 6 Econ 606 Jonathan Heathcote Due Tuesday...

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