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Applying Perturbation Methods to Incomplete Market Models with Exogenous Borrowing Constraints

Author Info

  • Henry Kim
  • Jinill Kim
  • Robert Kollmann

Abstract

This paper solves an incomplete market model with infinite number of agents and exogenous borrowing constraints described in den Haan, Judd and Juillard (2004). We apply the idea of “barrier methods” to convert optimization problem with borrowing constraints as inequalities into a problem with equality constraints, and the converted model is solved by a second-order perturbation method. The simulation results of impulse responses and second moments match the standardized features of incomplete market models. Accuracy of the solution is in a reasonable range but significantly decreases when the economy is near the borrowing limit or moves away from the steady state.

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File URL: http://ase.tufts.edu/econ/papers/200504.pdf
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Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0504.

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Date of creation: 2005
Date of revision:
Handle: RePEc:tuf:tuftec:0504
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Keywords: perturbation; barrier method; borrowing constraint; incomplete market; accuracy.;

Find related papers by JEL classification:

  • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
  • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
  • C88 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Other Computer Software
  • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  1. Marianne Baxter & Mario J. Crucini, 1992. "Business cycles and the asset structure of foreign trade," Discussion Paper / Institute for Empirical Macroeconomics 59, Federal Reserve Bank of Minneapolis.
  2. Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May.
  3. Kim, Jinill & Kim, Sunghyun Henry, 2003. "Spurious welfare reversals in international business cycle models," Journal of International Economics, Elsevier, vol. 60(2), pages 471-500, August.
  4. Jinill Kim & Sunghyun Henry Kim & Ernst Schaumburg & Christopher A. Sims, 2003. "Calculating and using second order accurate solutions of discrete time dynamic equilibrium models," Finance and Economics Discussion Series 2003-61, Board of Governors of the Federal Reserve System (U.S.).
  5. Fernando Alvarez & Urban J. Jermann, 1999. "Quantitative asset pricing implications of endogenous solvency constraints," Working Papers 99-5, Federal Reserve Bank of Philadelphia.
  6. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  7. Schmitt-Grohé, Stephanie & Uribe, Martín, 2002. "Closing Small Open Economy Models," CEPR Discussion Papers 3096, C.E.P.R. Discussion Papers.
  8. David K. Levine & William R. Zame, 2002. "Does Market Incompleteness Matter?," Econometrica, Econometric Society, vol. 70(5), pages 1805-1839, September.
  9. Kim, Sunghyun Henry & Kose, M. Ayhan, 2003. "Dynamics Of Open-Economy Business-Cycle Models: Role Of The Discount Factor," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 263-290, April.
  10. Felix Kubler & Karl Schmedders, 2000. "Incomplete Markets, Transitory Shocks And Welfare," Computing in Economics and Finance 2000 130, Society for Computational Economics.
  11. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
  12. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
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Cited by:

  1. Andrea Pescatori, 2007. "Incomplete markets and households’ exposure to interest rate and inflation risk: implications for the monetary policy maker," Working Paper 0709, Federal Reserve Bank of Cleveland.
  2. Darlene C. Chisholm & George Norman, 2006. "When to Exit a Product: Evidence from the U. S. Motion-Picture Exhibition Market," American Economic Review, American Economic Association, vol. 96(2), pages 57-61, May.
  3. Mauro F Roca, 2009. "Search in the Labor Market under Imperfectly Insurable Income Risk," IMF Working Papers 09/188, International Monetary Fund.
  4. Gilbert E. Metcalf & Jongsang Park, 2005. "A Comment on the Role of Prices for Excludable Public Goods," Discussion Papers Series, Department of Economics, Tufts University 0524, Department of Economics, Tufts University.
  5. Reiter, Michael, 2009. "Solving heterogeneous-agent models by projection and perturbation," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 649-665, March.
  6. Kim, Sunghyun Henry & Kollmann, Robert & Kim, Jinill, 2010. "Solving the incomplete market model with aggregate uncertainty using a perturbation method," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 50-58, January.
  7. Darlene C. Chisholm & Margaret S. McMillan & George Norman, 2006. "Product Differentiation and Film Programming Choice: Do First-Run Movie Theatres Show the Same Films?," NBER Working Papers 12646, National Bureau of Economic Research, Inc.
  8. Ioannides, Yannis M. & Soetevent, Adriaan R., 2007. "Social networking and individual outcomes beyond the mean field case," Journal of Economic Behavior & Organization, Elsevier, vol. 64(3-4), pages 369-390.
  9. Bulut Levent, 2011. "External Debts and Current Account Adjustments," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-53, December.
  10. Bingbing Dong, 2014. "Asset Pricing and Monetary Policy," 2014 Meeting Papers 881, Society for Economic Dynamics.
  11. Bruce Preston & Mauro Roca, 2007. "Incomplete Markets, Heterogeneity and Macroeconomic Dynamics," NBER Working Papers 13260, National Bureau of Economic Research, Inc.
  12. Antoni Calvo-Armengol & Yannis M. Ioannides, 2005. "Social Networks in Labor Markets," Discussion Papers Series, Department of Economics, Tufts University 0517, Department of Economics, Tufts University.

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