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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.

Suggested Citation

  • Michal Horvath, 2011. "Solving Models with Incomplete Markets and Aggregate Uncertainty Using the Krusell-Smith Algorithm: A Note on the Number and the Placement of Grid Points," CDMA Working Paper Series 201105, Centre for Dynamic Macroeconomic Analysis.
  • Handle: RePEc:san:cdmawp:1105
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    File URL: http://www.st-andrews.ac.uk/~wwwecon/CDMA/papers/wp1105.pdf
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    References listed on IDEAS

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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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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    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 06:55:40

    More about this item

    Keywords

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

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • 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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