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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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Complete Markets Aggregation

Complete Markets Aggregation

(p.269) Chapter 13 Complete Markets Aggregation
Recursive Models of Dynamic Linear Economies

Lars Peter Hansen

Thomas J. Sargent

Princeton University Press

This chapter outlines a setting with heterogeneity among households' preferences of a kind that violates the conditions for Gorman aggregation. Households' Engel curves are still affine, but dispersion of their slopes prevents Gorman aggregation. However, there is another sense in which there is a representative household whose preferences are a peculiar kind of average over the preferences of different types of households. The chapter shows how to compute and interpret this preference ordering over economy-wide aggregate consumption. This complete markets aggregate preference ordering cannot be computed until one knows the distribution of wealth evaluated at equilibrium prices, so it is less useful than the one produced by Gorman aggregation.

Keywords:   heterogeneous households, household preferences, Gorman aggregation, Engel curves, aggregate consumption

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