Solving Models with Incomplete Markets and Aggregate Uncertainty Using the Krusell-Smith Algorithm: A Note on the Number and the Placement of Grid Points
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.
|Date of creation:||15 Apr 2011|
|Date of revision:|
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- 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.
- Lilia Maliar & Fernando Valli & Serguei Maliar, 2009. "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm," Working Papers. Serie AD 2009-03, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- Lilia Maliar & Fernando Valli & Seguei Maliar, 2009. "Matlab code for "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm"," QM&RBC Codes 180, Quantitative Macroeconomics & Real Business Cycles.
- 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.
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