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Dynamic $(S, s)$ Economies

Ricardo J. Caballero
Eduardo M. R. A. Engel

Abstract

In this paper we provide a framework to study the aggregate dynamic behavior of an economy where individual units follow $(S, s)$ policies. We characterize structural and stochastic heterogeneities that ensure convergence of the economy's aggregate to that of its frictionless counterpart, determine the speed at which convergence takes place, and describe the transitional dynamics of this economy.