ECON 702 Midterm: Krueger_Aug2011-1_702_0
Document Summary
The social planner in the stochastic neoclassical growth model chooses stochastic consumption and capital allocations fct; kt+1g to solve the following maximiza- tion problem max e0. X t=0 (cid:12) tu (ct) s. t. ct + kt+1 = ztk(cid:11) t with (cid:12) 2 (0; 1) and (cid:11) 2 (0; 1) being parameters. The initial endowment of capi- tal k0 is given, and households are endowed with one unit of time in every period. technology shock zt follows a n -state markov chain. A where rows refer to states today, and columns to states tomorrow. Com- pute the set of all invariant distributions associated with (cid:25): write down the functional equation the solution to which solves the social planner(cid:146)s problem. State explicitly what the state variables and control variables are: write down the (cid:133)rst order condition(s). Now consider economy e2 in which, in addition to. 1 capital, households can save (or borrow) by trading a full set of state- contingent arrow securities.
