$C$’s that appear in the pricing functions, then

- consumers’ Euler equations are satisfied if little $c$’s are

equated to Big C’s

equated to Big $C$’s

- firms’ first-order necessary conditions for $k, b$ are

satisfied.

- $\check q = q(K,B)$ and

$\epsilon^* \equiv \log\left(\frac{b}{Ak^\alpha}\right)$.

1. (In this step we abuse notation by freezing $V, k, b$ and in

effect temporarily treating them as Big $K,B$ values. Thus, in

this step 6 little k, b are frozen at guessed at value of K, B.)

this step 6 little $k, b$ are frozen at guessed at value of $K, B$.)

Fixing the values of $V$, $b$ and $k$, compute

optimal choices of consumption $c^i$ with consumers’ FOCs.

Assume that only agent 2 holds debt: $\xi^2 = b$ and that both agents