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Solving heterogeneous-agent models by projection and perturbation

  • Reiter, Michael

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Christopher D. Carroll, 2004. "Theoretical Foundations of Buffer Stock Saving," Economics Working Paper Archive 517, The Johns Hopkins University,Department of Economics.
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  5. Bruce Preston & Mauro Roca, 2007. "Incomplete Markets, Heterogeneity and Macroeconomic Dynamics," NBER Working Papers 13260, National Bureau of Economic Research, Inc.
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  9. Lopez-Salido, Jose David & Michelacci, Claudio, 2004. "Technology Shocks and Job Flows," CEPR Discussion Papers 4426, C.E.P.R. Discussion Papers.
  10. 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.
  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, June.
  13. Michael Reiter, 2001. "Recursive Solution Of Heterogeneous Agent Models," Computing in Economics and Finance 2001 167, Society for Computational Economics.
  14. Yann Algan & Olivier Allais & Wouter J. Den Haan, 2006. "Solving heterogeneous-agent models with parameterized cross-sectional distributions," PSE Working Papers halshs-00589129, HAL.
  15. 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.
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