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RECURSIVE EQUILIBRIA IN ECONOMIES WITH INCOMPLETE MARKETS

Published online by Cambridge University Press:  16 May 2002

Felix Kubler  and
Karl Schmedders
Felix Kubler
Affiliation:
Stanford University
Karl Schmedders
Affiliation:
Northwestern University
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Abstract

We examine minimal sufficient state spaces for equilibria in a Lucas asset pricing model with heterogeneous agents and incomplete markets. It is clear that even if all fundamentals of the economy follow a first-order Markov process, equilibrium prices and allocations generally will depend not only on the current exogenous shock but also on the distribution of wealth among the heterogeneous agents. The main contribution of this paper is to give an example of an infinite-horizon economy with Markovian fundamentals, where the joint process of equilibrium asset holdings and exogenous shocks does not constitute a sufficient state space either.

Keywords

Incomplete MarketsHeterogeneous AgentsRecursive EquilibriaMarkovian ShocksSufficient State Space
Type
Research Article
Information
Macroeconomic Dynamics , Volume 6 , Issue 2 , April 2002 , pp. 284 - 306
Copyright
© 2002 Cambridge University Press

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