The Optimum Quantity of Debt: Technical Appendix

S. Rao Aiyagari

and

Ellen R. McGrattan

We describe the numerical method used to compute equilibria in the economies studied by Aiyagari and McGrattan, The Optimum Quantity of Debt (Journal of Monetary Economics 1998). These economies have a large number of infinitely lived households whose saving behavior is influenced by precautionary saving motives and borrowing constraints. We apply the finite element method to compute households’ saving decisions and to compute the distribution of asset holdings. To verify that the method works well for our problems, we apply them to some related test problems with known solutions.