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Solving Models with Incomplete Markets and Aggregate Uncertainty Using the Krusell-Smith Algorithm: A Note on the Number and the Placement of Grid Points

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  • Michal Horvath

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Abstract

This paper shows that numerical solutions to models with incomplete markets and aggregate uncertainty obtained using the Krusell and Smith (1998) algorithm are sensitive to the parameterization of the grid in the aggregate asset holdings direction. Higher moments of the cross-sectional distribution of asset holdings can be particularly affected, which is important for welfare analysis. Using grids that are denser around the mean of the ergodic distribution of individual asset holdings can enhance the consistency of the results across parameterizations. The accuracy of the approximation to individual decision functions can be much improved this way.

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File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/wp1105.pdf
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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201105.

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Date of creation: 15 Apr 2011
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Handle: RePEc:san:cdmawp:1105

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Keywords: Incomplete Markets; Aggregate Uncertainty; Heterogeneous agents; Simulations; Numerical Solutions.;

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  1. Den Haan, Wouter J. & Judd, Kenneth L. & Juillard, Michel, 2010. "Computational suite of models with heterogeneous agents: Incomplete markets and aggregate uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 1-3, January.
  2. Maliar, Lilia & Maliar, Serguei & Valli, Fernando, 2010. "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 42-49, January.
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  1. Solving Models with Incomplete Markets and Aggregate Uncertainty Using the Krusell-Smith Algorithm: A Note on the Number and the Placement of Grid Points
    by Christian Zimmermann in NEP-DGE blog on 2011-05-09 01:55:40

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