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Recursive Models of Dynamic Linear Economies$
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Lars Peter Hansen and Thomas J. Sargent

Print publication date: 2013

Print ISBN-13: 9780691042770

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691042770.001.0001

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Permanent IncomeModels

Permanent IncomeModels

(p.233) Chapter 11 Permanent IncomeModels
Recursive Models of Dynamic Linear Economies

Lars Peter Hansen

Thomas J. Sargent

Princeton University Press

This chapter uses the model of preferences to represent multiple goods versions of permanent income models. It retains Robert Hall's (1978) specification of a “storage” technology for accumulating physical capital and also a restriction on the discount factor, depreciation rate, and gross return on capital that in Hall's simple setting made the marginal utility of consumption a martingale. In more general settings, adopting Hall's specification of the storage technology imparts a martingale to outcomes, but it is concealed in an “index” whose increments drive demands for multiple consumption goods that themselves are not martingales. This permanent income model forms a convenient laboratory for thinking about sources in economic theory of “unit roots” and “co-integrating vectors”.

Keywords:   preferences model, multiple goods, permanent income model, storage technology, consumption

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