Affiliation:
1. ETH Zürich
2. Federal Reserve Bank of Cleveland
Abstract
Repeatedly solving the Aiyagari (1994) model with random parameters, we construct hundreds of examples with multiple stationary equilibria. We never find multiplicity with risk aversion less than ≈ 1.49, depreciation less than ≈ 0.19, or income persistence less than ≈ 0.47, and multiplicity requires a disaster state for income. In cases with multiplicity, the lowest rental rate occurs near depreciation times the capital share. It is possible for the economy, without a change in fundamentals, to transition rationally from a higher-rate equilibrium to one with a lower rental rate, lower inequality, and lower welfare (for most agents). We also construct the first Krusell and Smith (1998) examples with multiple recursive competitive equilibria.
Publisher
Federal Reserve Bank of Cleveland
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