Debt, Deficits and Finite Horizons: The Stochastic Case
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NBER Working Paper No. 15025*
Issued in June 2009
NBER Program(s): EFG
We introduce a solution technique for the study of discrete time stochastic models populated by long-lived agents. We introduce aggregate uncertainty and complete markets into a 'perpetual-youth' model of a kind first studied by Olivier Blanchard and we show that the pure-trade version of the model behaves much like the two-period overlapping generations model. Our methods are easily generalized to economies with production and they should prove useful to researchers who seek a tractable stochastic model in which fiscal policy has real effects on aggregate allocations.
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