Self-Justified Equilibria: Existence and Computation

Kübler, Felix; Scheidegger, Simon

doi:10.2139/ssrn.3494876

Cited by 12 publications

(10 citation statements)

References 54 publications

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“…Off-equilibrium, the PLM and the actual law of motion may diverge, but households never discover it, as this region is never visited. For details about self-justified equilibria, see Kubler and Scheidegger (2018).…”

Section: Maximizing the Likelihoodmentioning

confidence: 99%

Financial Frictions and the Wealth Distribution

2020

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This paper investigates how, in a heterogeneous agents model with financial frictions, idiosyncratic individual shocks interact with exogenous aggregate shocks to generate timevarying levels of leverage and endogenous aggregate risk. To do so, we show how such a model can be efficiently computed, despite its substantial nonlinearities, using tools from machine learning. We also illustrate how the model can be structurally estimated with a likelihood function, using tools from inference with diffusions. We document, first, the strong nonlinearities created by financial frictions. Second, we report the existence of multiple stochastic steady states with properties that differ from the deterministic steady state along important dimensions. Third, we illustrate how the generalized impulse response functions of the model are highly state-dependent. In particular, we find that the recovery after a negative aggregate shock is more sluggish when the economy is more leveraged. Fourth, we prove that wealth heterogeneity matters in this economy because of the asymmetric responses of household consumption decisions to aggregate shocks.

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Section: Maximizing the Likelihoodmentioning

confidence: 99%

Financial Frictions and the Wealth Distribution

2020

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“…Our implementation follows Krusell and Smith (1998), in general, and Kubler and Scheidegger (2019), in particular, by condensing the distribution of assets across agents into one state variable.…”

Section: Recursive Formulation Of the Olg Modelmentioning

confidence: 99%

Pareto-improving carbon-risk taxation

et al. 2021

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Anthropogenic climate change produces two conceptually distinct negative economic externalities. The first is an expected path of climate damage. The second, the focus of this paper, is an expected path of economic risk. To isolate the climate-risk problem, we consider three mean-zero, symmetric shocks in our 12-period, overlapping generations model. These shocks impact dirty energy usage (carbon emissions), the relationship between carbon concentration and temperature, and the connection between temperature and damages. By construction, Our model exhibits a de minimis climate problem absent its shocks. However, due to non-linearities, symmetric shocks deliver negatively skewed impacts, including the potential for climate disasters. As we show, Pareto-improving carbon taxation can dramatically lower climate risk, in general, and disaster risk, in particular. The associated climate-risk tax, which is focused exclusively on limiting climate risk, can be as large as, or larger than, the carbon average-damage tax, which is focused exclusively on limiting average damage.

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“…An obvious shortcoming of our approach lies in the fact that the sets of admissible forecasts are exogenous. It would be useful to consider a loss function that chooses forecasts to trade off accuracy and the complexity of the forecast (see, e.g., Kübler and Scheidegger (2019)). It is worth noting that forecasting errors for P 3 ca are generally very small, and it seems difficult to argue in favor of the need for more accuracy.…”

Section: Computation In An Olg Economy: Numerical Examplesmentioning

confidence: 99%

Uniformly Self-Justified Equilibria

Kübler¹,

Scheidegger²

2021

Preprint

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We consider dynamic stochastic economies with heterogeneous agents and introduce the concept of uniformly self-justified equilibria (USJE)-temporary equilibria for which forecasts are best uniform approximations to a selection of the equilibrium correspondence. In a USJE, individuals' forecasting functions for the next period's endogenous variables are assumed to lie in a compact, finite-dimensional set of functions, and the forecasts constitute the best approximation within this set. We show that USJE always exist and develop a simple algorithm to compute them. Therefore, they are more tractable than rational expectations equilibria that do not always exist. As an application, we discuss a stochastic overlapping generations exchange economy and provide numerical examples to illustrate the concept of USJE and the computational method.

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Self-Justified Equilibria: Existence and Computation

Cited by 12 publications

References 54 publications

Financial Frictions and the Wealth Distribution

Financial Frictions and the Wealth Distribution

Pareto-improving carbon-risk taxation

Uniformly Self-Justified Equilibria

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