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Journal Articles Journal of Economic Dynamics and Control Year : 2023

Optimal Policies with Heterogeneous Agents: Truncation and Transitions

Xavier Ragot

Abstract

We compare two approaches in their ability to solve for optimal Ramsey policies in heterogeneous-agent models, considering the optimal provision of a public good. First, the "transition" approach makes the problem tractable by assuming a constant path for the planner's instruments. Second, the "truncation" approach uses a Lagrangian technique, solving the Ramsey problem of a finite state space model that approximates the full model. The truncation approach is shown to compute quantitatively accurate estimates of the actual values of the planner's instruments, whereas a time-inconsistency issue is found to affect the transition approach.
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Dates and versions

hal-04384031 , version 1 (11-01-2024)

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Xavier Ragot, François Legrand. Optimal Policies with Heterogeneous Agents: Truncation and Transitions. Journal of Economic Dynamics and Control, 2023, 156, ⟨10.1016/j.jedc.2023.104737⟩. ⟨hal-04384031⟩
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