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Solving the Incomplete Markets Model with Aggregate Uncertainty using Explicit Aggregation

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Author Info
Den Haan, Wouter
Rendahl, Pontus

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Abstract

We construct a method to solve models with heterogeneous agents and aggregate uncertainty that is simpler than existing algorithms; the aggregate law of motion is obtained neither by simulation nor by parameterization of the cross-sectional distribution, but by explicitly aggregating the individual policy rule. This establishes a link between the individual policy rule and the set of necessary aggregate state variables. In particular, the cross-sectional average of each basis function in the individual policy rule is a state variable. That is, if the individual capital stock, k, (or k²) enters the policy function then the mean of k (or the mean of k²) is a state variable. The laws of motions for these aggregate state variables are obtained by explicit aggregation of separate individual policy functions for the different elements.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6963.

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Date of creation: Sep 2008
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Handle: RePEc:cpr:ceprdp:6963

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Related research
Keywords: numerical solutions; projection methods;

Find related papers by JEL classification:
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bruce Preston & Mauro Roca, 2007. "Incomplete Markets, Heterogeneity and Macroeconomic Dynamics," NBER Working Papers 13260, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Den Haan, Wouter, 2008. "Assessing the Accuracy of the Aggregate Law of Motion in Models with Heterogeneous Agents," CEPR Discussion Papers 6971, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October. [Downloadable!] (restricted)
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  4. Carroll, Christopher D., 2006. "The method of endogenous gridpoints for solving dynamic stochastic optimization problems," Economics Letters, Elsevier, vol. 91(3), pages 312-320, June. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Den Haan, Wouter, 2008. "Assessing the Accuracy of the Aggregate Law of Motion in Models with Heterogeneous Agents," CEPR Discussion Papers 6971, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Den Haan, Wouter, 2008. "Comparison of Solutions to the Incomplete Markets Model with Aggregate Uncertainty," CEPR Discussion Papers 7019, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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