Optimal Policies with Heterogeneous Agents: Truncation and Transitions

Xavier Ragot (1) , François Legrand (2)

1 Sciences Po - Sciences Po
2 ESC [Rennes] - ESC Rennes School of Business

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.

Mots clés: Heterogeneous agents optimal Ramsey program transition approach truncation approach aggregate shock D31 D52 E21; Heterogeneous agents; optimal Ramsey program; transition approach; truncation approach; aggregate shock D31; D52; E21

Domaines: Économie et finance quantitative [q-fin]

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⟩