Households, auctioneers, and aggregation

We examine aggregation in the neoclassical growth model with aggregate shocks and uninsurable employment risk, as well related environments. introduce a Walrasian auctioneer whose job is to report households all possible state-contingent future prices. Households take these given when forming expectations making optimal consumption/savings decisions, adjusts her forecasts until markets clear. This natural dichotomy between allows us study each problem isolation discuss intersection. On household side, we separate an explicit expression for linear permanent income component of savings from well-behaved nonlinear adjustment arising precautionary behavior incomplete markets. Equipped this decomposition, then how economies presence various types that are popular literature. The steady-state Huggett (1997) Aiyagari (1994) offers paper-and-pencil analysis provides bound on more complex provide economic interpretation regression coefficients explain lack time variation Krusell Smith (1998). also new numerical method which uses empirical distribution substantially improve solution accuracy cases where standard coefficient determination other well-known statistics prove be misleading.