multiplier approach to understanding the macro implications of household finance
By: YiLi Chien, Harold Cole, Hanno Lustig.
Contributors: Cole, Harold Linh, 1957-; Lustig, Hanno.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13555.; Working paper series (National Bureau of Economic Research) -- working paper no. 13555.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 56
Subjects: Investments -- Econometric models
Description: Our paper examines the impact of heterogeneous investment opportunities on the distribution of asset shares and wealth in an equilibrium model. We develop a new method for computing equilibria in this class of economies. This method relies on an optimal consumption sharing rule and an aggregation result for state prices that allows us to solve for equilibrium prices and allocations without having to search for market-clearing prices in each asset market. In a calibrated version of our model, we show that the heterogeneity in trading opportunities allows for a closer match of the wealth and asset share distribution as well as the moments of asset prices. We distinguish between "passive" traders who hold fixed portfolios of equity and bonds, and "active" traders who adjust their portfolios to changes in the investment opportunity set. In the presence of non-participants, the fraction of total wealth held by active traders is critical for asset prices, because only these traders respond to variation in state prices and hence help to clear the market, not the fraction of wealth held by all agents that participate in asset markets.
Notes: "October 2007"

Includes bibliographical references (p. 42-44).

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