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Solving the incomplete markets model with aggregate uncertainty by backward induction

  • Reiter, Michael

This paper describes a method to solve models with a continuum of agents, incomplete markets and aggregate uncertainty. I use backward induction on a finite grid of points in the aggregate state space. The aggregate state includes a small number of statistics (moments) of the cross-sectional distribution of capital. For any given set of moments, agents use a specific cross-sectional distribution, called "proxy distribution", to compute the equilibrium. Information from the steady state distribution as well as from simulations can be used to chose a suitable proxy distribution.

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File URL: http://www.sciencedirect.com/science/article/B6V85-4WYDMW5-6/2/9b9d617936db9cba636eaca008aeb221
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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 1 (January)
Pages: 28-35

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:1:p:28-35
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Christopher D. Carroll, 2005. "The Method of Endogenous Gridpoints for Solving Dynamic Stochastic Optimization Problems," NBER Technical Working Papers 0309, National Bureau of Economic Research, Inc.
  2. Algan, Yann & Allais, Olivier & Den Haan, Wouter J., 2008. "Solving heterogeneous-agent models with parameterized cross-sectional distributions," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 875-908, March.
  3. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
  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, 2008. "Comparison of Solutions to the Incomplete Markets Model with Aggregate Uncertainty," CEPR Discussion Papers 7019, C.E.P.R. Discussion Papers.
  6. Den Haan, Wouter J, 1996. "Heterogeneity, Aggregate Uncertainty, and the Short-Term Interest Rate," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(4), pages 399-411, October.
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