The Aiyagari Model

Lecture 4 · 2026-04-07

The benchmark model of incomplete markets with heterogeneous agents: households face uninsurable idiosyncratic income risk, solve a standard savings problem, and the asset-income distribution is represented as a Markov chain to obtain its stationary distribution. In the production economy of Aiyagari (1994), factor prices are determined endogenously by the firm’s marginal conditions, and the general-equilibrium capital stock and interest rate are pinned down by the market-clearing fixed point. The solution is implemented in JAX, covering Howard policy iteration, the endogenous grid method (EGM), and power iteration for the stationary distribution, with supplementary notes on EGM.

Materials

• Slides: HTML · PDF
• Notebook: aiyagari_jax.ipynb
• Supplementary notes: EGM using JAX (PDF)

Readings

• Aiyagari (1994), “Uninsured Idiosyncratic Risk and Aggregate Saving,” QJE 109(3), 659–684.
• Huggett (1993), “The Risk-Free Rate in Heterogeneous-Agent Incomplete-Insurance Economies,” JEDC 17(5–6), 953–969.
• Bewley (1986), “Stationary Monetary Equilibrium with a Continuum of Independently Fluctuating Consumers.”