Cover

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Title Page, Copyright

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Contents

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pp. vii-xi

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Preface

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pp. xiii-xiv

In 1992, Carolyn Sargent said, “You are writing the second edition of your book before you have published the first.” Her assertion was correct. We wrote 90 percent of this book between 1988 and 1994, but completed it only in 2012. Richard Blundell’s invitation to deliver the Gorman Lectures at University College...

Acknowledgments

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p. xv

Part I: Overview

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1. Theory and Econometrics

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pp. 3-12

Economic theory identifies patterns that unite apparently diverse subjects. Consider the following models:
1. Ryoo and Rosen’s (2004) partial equilibrium model of the market for engineers;
2. Rosen, Murphy, and Scheinkman’s (1994) model of cattle cycles;
3. Lucas’s (1978) model of asset prices;
4. Brock and Mirman’s (1972) and Hall’s (1978)

Part II: Tools

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2. Linear Stochastic Difference Equations

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pp. 15-32

This chapter introduces the vector first-order linear stochastic difference equation. 1 We use it first to represent information flowing to economic agents, then again to represent competitive equilibria. The vector first-order linear stochastic difference equation is associated with a tidy theory of prediction and a host...

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3. Efficient Computations

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pp. 33-58

This chapter describes fast algorithms for computing the value function and optimal decision rule for the type of social planning problem to be described in chapter 5.1 This same decision rule determines the competitive equilibrium allocation to be described in chapter 7, while the optimal value function for the...

Part III: Components of Economies

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4. Economic Environments

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pp. 61-78

This chapter describes an economic environment with five components: a sequence of information sets, laws of motion for taste and technology shocks, a technology for producing consumption goods, a technology for producing services from consumer durables and consumption purchases, and a preference...

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5. Optimal Resource Allocations

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pp. 79-124

We eventually want to use our models to study aspects of competitive equilibria, including time series properties of various quantities, spot market prices, asset prices, and rates of return. The first welfare theorem asserts that competitive equilibrium allocations solve a particular resource allocation problem, which in...

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6. A Commodity Space

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pp. 125-130

This chapter describes a concept of value that we shall later use to formulate a model in which the decisions of agents are reconciled in a competitive equilibrium. We describe a commodity space in which quantities and prices both will reside. The stochastic Lagrange multipliers of chapter 4 are closely related...

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7. Competitive Economies

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pp. 131-150

This chapter describes a decentralized economy. We assign ownership and decision making to three distinct economic entities, a household and two kinds of firms. We define a competitive equilibrium. Two fundamental theorems of welfare economics connect a competitive equilibrium to a planning problem...

Part IV: Representations and Properties

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8. Statistical Representations

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pp. 153-190

This chapter shows how models restrict observed prices and quantities, and how observations can be used to make inferences about parameters. Earlier chapters have prepared a state-space representation that expresses states xt and observables yt as linear functions of an initial state x0 and histories of martingale...

9. Canonical Household Technologies

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pp. 191-216

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10. Examples

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pp. 217-232

Some of the general equilibrium models in this book can be reinterpreted as partial equilibrium models that employ the notion of a representative firm, and that generalize the preference and technology specifications of Lucas and Prescott (1971). The idea is that there is a large number of identical firms that produce...

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11. Permanent Income Models

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pp. 233-252

This chapter describes a class of permanent income models of consumption. These models stress connections between consumption and income implied by present-value budget balance and generate interesting predictions about responses of components of consumption to shocks to consumers’ information...

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12. Gorman Heterogeneous Households

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pp. 253-268

This chapter and the next describe methods for computing equilibria of economies with consumers who have heterogeneous preferences and endowments. In both chapters, we adopt simplifications that facilitate coping with heterogeneity. In the present chapter, we describe a class of heterogeneous consumer economies...

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13. Complete Markets Aggregation

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pp. 269-290

Chapter 12 studied a setting in which households have heterogeneous endowments and preference shocks, but otherwise have identical preferences and household technologies, implying that all households share linear Engel curves with the same slopes. The property of identically sloped linear Engel curves delivers...

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14. Periodic Models of Seasonality

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pp. 291-326

Until now, each of the matrices defining preferences, technologies, and information flows has been specified to be constant over time. In this chapter, we relax this assumption and let the matrices be strictly periodic functions of time. Our interest is to apply and extend an idea of Denise Osborn (1988) and Richard...

A. MATLAB Programs

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pp. 327-378

References

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pp. 379-392

Subject Index

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pp. 393-396

Author Index

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pp. 397-398

MATLAB Index

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pp. 399-402