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
ﬃ
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 equallyspaced 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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 Economics, 12 months, one year, 3.4%, average income, Jonathan Heathcote

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