New Micro-foundations for Macroeconomics
"Equilibrium in a Production Model with Limited Commitment"
Tom Krebs (Mannheim)Saturday 11 July, 16.00 - 16.45
Abstract
This paper develops a tractable macroeconomic model with production and limited commitment (limited
enforceability of contracts). The paper shows how recursive equilibria can be exactly computed by solving
a convex, finite-dimensional fixed point problem, and proves the existence of recursive equilibria by proving
the existence of a solution the finite-dimensional fixed point problem. The paper also shows that a calibrated
version of the model is consistent with some important empirical facts about individual income and
consumption. In particular, the model generates a limited amount of individual consumption insurance and
a strong response of individual consumption to uninsured permanent income shocks.