Debt, Deficits and Finite Horizons: The Stochastic Case
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.
This study is supported in part by NSF grant #0720839 and by French National Research Agency, Grant ANR-08-BLAN-0245-01. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Farmer, Roger E.A. & Nourry, Carine & Venditti, Alain, 2011. "Debt, deficits and finite horizons: The stochastic case," Economics Letters, Elsevier, vol. 111(1), pages 47-49, April. citation courtesy of