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Working paper

Idiosyncratic Shocks, Aggregation and Wealth Distribution

Karev M. G.
One of the fundamental sources of heterogeneity in real-life economies lies in stochastic nature of individual income. However to incorporate this heterogeneity into a tractable general equilibrium model presents a difficult problem since the dynamics of such economies is the type-distribution of agents. For that reason research has been concentrated for the last 20 years on numerical methods. This paper offers an analytical framework that helps to characterize the behavior of economies with idiosyncratic income shocks in close analogy to the standard representative agent model. The first part deals with aggregation issue. The second part develops special models, the so called constant prudence economies, that yield a remarkably high level of approximation (0,05% precision in the calibrated model).