Staff Report 203

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Technical Appendix: The Optimum Quantity of Debt

S. Rao Aiyagari
Ellen R. McGrattan - Consultant

Revised November 1, 1997

In this appendix, we describe the numerical methods used to compute an equilibrium in the economy with an inelastic labor supply and in the economy with an elastic labor supply (i.e., our benchmark economy). Although the economy with inelastically supplied labor is a special case of the benchmark economy, the equilibrium in the inelastic labor supply case is much easier to compute and is therefore treated separately. In each case, we start with the consumer's problem, assuming the consumer takes prices as given. We then show how the equilibrium prices are determined. To verify that the methods work well with our problem, we apply them to some related test problems that have known solutions.

RELATED PAPER: Staff Report 203 The Optimum Quantity of Debt

Published In: Annals of Economics and Finance (Vol. 4, No. 1, 2003, pp. 193-217)

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