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Solving heterogeneous-agent models by projection and perturbation

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  • Reiter, Michael

Abstract

The paper proposes a numerical solution method for general equilibrium models with a continuum of heterogeneous agents that combines elements of projection and of perturbation methods. The basic idea is to solve first for the stationary solution of the model, without aggregate shocks but with fully specified idiosyncratic shocks. Afterwards one computes a first-order perturbation of the solution in the aggregate shocks. This approach allows to include a high-dimensional representation of the cross-sectional distribution in the state vector. The method is applied to a model of household saving with uninsurable income risk and liquidity constraints. Techniques are discussed to reduce the dimension of the state space such that higher order perturbations are feasible.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 3 (March)
Pages: 649-665

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:3:p:649-665

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Heterogeneous agents Projection methods Perturbation methods Invariant distribution;

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References

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  1. Henry Kim & Jinill Kim & Robert Kollmann, 2005. "Applying Perturbation Methods to Incomplete Market Models with Exogenous Borrowing Constraints," Discussion Papers Series, Department of Economics, Tufts University 0504, Department of Economics, Tufts University.
  2. Jianjun Miao, 2004. "Competitive Equilibria of Economies with a Continuum of Consumers and Aggregate Shocks," CEMA Working Papers 460, China Economics and Management Academy, Central University of Finance and Economics.
  3. Claudio Michelacci & David Lopez-Salido, 2007. "Technology Shocks and Job Flows," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1195-1227.
  4. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
  5. Den Haan, Wouter J., 1997. "Solving Dynamic Models With Aggregate Shocks And Heterogeneous Agents," Macroeconomic Dynamics, Cambridge University Press, vol. 1(02), pages 355-386, June.
  6. Michael Reiter, 2001. "Recursive Solution Of Heterogeneous Agent Models," Computing in Economics and Finance 2001 167, Society for Computational Economics.
  7. Olivier Allais & Wouter J Den Haan & Yann Algan, 2006. "Solving Heterogeneous-agent Models with Parameterized Cross-sectional Distributions," Sciences Po publications 2006 - 46, Sciences Po.
  8. Carroll, Christopher D., 2011. "Theoretical foundations of buffer stock saving," CFS Working Paper Series 2011/15, Center for Financial Studies (CFS).
  9. Jeffrey R. Campbell, 1997. "Entry, Exit, Embodied Technology, and Business Cycles," NBER Working Papers 5955, National Bureau of Economic Research, Inc.
  10. Bruce Preston & Mauro Roca, 2007. "Incomplete Markets, Heterogeneity and Macroeconomic Dynamics," NBER Working Papers 13260, National Bureau of Economic Research, Inc.
  11. Saez, Emmanuel, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Wiley Blackwell, vol. 68(1), pages 205-29, January.
  12. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
  13. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, with and without Liquidity Constraints," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 23-45, Summer.
  14. Radim Bohacek & Michal Kejak, 2005. "Projection Methods for Economies with Heterogeneous Agents," CERGE-EI Working Papers wp258, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  15. Jeffrey R. Campbell, 1997. "Computational Appendix to Entry, Exit, Embodied Technology, and Business Cycles," Technical Appendices campbell98, Review of Economic Dynamics.
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