Aggregating heterogeneous-agent models with permanent income shocks

Karl Harmenberg

Journal of Economic Dynamics and Control, 2021, vol. 129, issue C

Abstract: I introduce a method for simulating aggregate dynamics of heterogeneous-agent models where log permanent income follows a random walk. The idea is to simulate the model using a counterfactual permanent-income-neutral measure which incorporates the effect that permanent income shocks have on macroeconomic aggregates. With the permanent-income-neutral measure, one does not need to keep track of the permanent-income distribution. The permanent-income-neutral measure is both useful for the analytical characterization of aggregate consumption-savings behavior and for simulating numerical models. Furthermore, it is trivial to implement with a few lines of code.

Date: 2021
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Working Paper: Aggregating Heterogeneous-Agent Models with Permanent Income Shocks (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:129:y:2021:i:c:s0165188921001202

DOI: 10.1016/j.jedc.2021.104185

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