Understanding Equilibrium Models with a Small and a Large Number of Agents / Wouter J. Den Haan.

Format:

Book

Author/Creator:

Haan, Wouter J. Den.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5792.

NBER working paper series no. w5792

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1996.

Summary:

In this paper, I compare a two-agent asset pricing model with the corresponding model with a continuum of agents. In a two-agent economy, interest rates respond to because each agent represents half of the population. These interest rate effects facilitate consumption smoothing. An agent in a two-agent economy, however, can never lend more than the other agent is allowed to borrow, which prevents him from building a buffer stock of assets. For most parameter values, the first effect is more important. For some parameter values, the interest rate effects in the two-agent economy are so strong that a relaxation of the borrowing constraint reduces an agent's utility. In contrast to these differences, I find that for most parameter values there are no large differences in average interest rates across the two types of economies. In addition, I analyze the business cycle behavior of interest rates in an incomplete markets economy with a continuum of agents. The dynamic response of interest rates to aggregate shocks is a lot more complicated than the response in a complete markets economy and the magnitude of the response is bigger.

Notes:

Print version record

October 1996.