This project investigates the theoretical properties of intertemporal general equilibrium models and explores the possibilities for applying these models to analyze such policy changes as the free trade agreement currently being negotiated by Canada, Mexico, and the United States. The project has three components. The first is a theoretical investigation of equilibria of dynamic games with a large number of agents. In this kind of model, agents' actions do not have effects that can feed back by changing all other agents' actions. This feature makes these games simpler to analyze than repeated games that focus on punishment strategies and effects of reputation. This simplicity allows the introduction of state variables, such as wealth holdings and capital goods, that play an important role. The second component of the project is a theoretical and empirical investigation of how an intertemporal general equilibrium model with endogenous debt constraints can explain variations in individual consumption. The economies with debt constraints will be studied and the qualitative features of their equilibria will be contrasted with those of economies with more traditional borrowing constraints. Two models will be constructed and calibrated to Consumer Expenditure Survey Data to study how well debt constraints explain patterns in life-cycle consumption and responses of consumption to shocks in individual income. The third component of the project is the development of criteria for evaluating the performance of applied general equilibrium models. The results of this study would aid in the development of a dynamic model to analyze the impact of a potential free trade agreement on the economies of Canada, Mexico, and the United States.
