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Refining the truncation method to solve heterogeneous-agent models

Author

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  • François Le Grand
  • Xavier Ragot

    (Sciences Po - Sciences Po)

Abstract

We present a refinement of the uniform truncation method of LeGrand and Ragot (2022) to solve heterogeneous-agent models with aggregate shocks. The method consists in providing a finite state-space representation of such economies by truncating idiosyncratic histories. The innovation compared to the uniform method is to allow for truncated histories of different lengths. This offers a finer representation when needed, while considerably reducing the model dimensionality. The method reproduces the steady-state distribution of any heterogeneousagent model and solves for its dynamics in the presence of aggregate shocks. As the uniform method, the refined method can be solved using perturbation methods and hence implemented with standard software, such as Dynare. We show that the refined truncation method provides accurate results that improve on those of the uniform method.

Suggested Citation

  • François Le Grand & Xavier Ragot, 2022. "Refining the truncation method to solve heterogeneous-agent models," Post-Print hal-04384033, HAL.
    • Handle: RePEc:hal:journl:hal-04384033
    Note: View the original document on HAL open archive server: https://hal.science/hal-04384033v1
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    1. SeHyoun Ahn & Greg Kaplan & Benjamin Moll & Thomas Winberry & Christian Wolf, 2018. "When Inequality Matters for Macro and Macro Matters for Inequality," NBER Macroeconomics Annual, University of Chicago Press, vol. 32(1), pages 1-75.
    2. François Le Grand & Xavier Ragot, 2022. "Managing Inequality Over Business Cycles: Optimal Policies With Heterogeneous Agents And Aggregate Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(1), pages 511-540, February.
    3. 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.
    4. Young, Eric R., 2010. "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm and non-stochastic simulations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 36-41, January.
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    2. Le Grand, François & Ragot, Xavier, 2023. "Optimal policies with heterogeneous agents: Truncation and transitions," Journal of Economic Dynamics and Control, Elsevier, vol. 156(C).

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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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