Computing Dynamic Heterogeneous-Agent Economies: Tracking the Distribution

Grey Gordon

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: Theoretical formulations of dynamic heterogeneous-agent economiestypically include a distribution as an aggregate state variable. This paperintroduces a method for computing equilibrium of these models by including a distribution directly as a state variable if it is finite-dimensional or a fine approximation of it if infinite-dimensional. The method accurately computes equilibrium in an extreme calibration of Huffman's (1987) overlapping-generations economy where quasi-aggregation, the accurate forecasting of prices using a small state space, fails to obtain. The method also accurately solves for equilibrium in a version of Krusell and Smith's (1998) economy wherein quasi-aggregation obtains but households face occasionally binding constraints. The method is demonstrated to be not only accurate but also feasible with equilibria for both economies being computed in under ten minutes in Matlab. Feasibility is achieved by using Smolyak's (1963) sparse-grid interpolation algorithm to limit the necessary number of gridpoints by many orders of magnitude relative to linear interpolation. Accuracy is achieved by using Smolyak's algorithm, which relies on smoothness, only for representing the distribution and not for other state variables such as individual asset holdings.

Keywords: Numerical Solutions; Heterogeneous Agents; Projection Methods (search for similar items in EconPapers)
JEL-codes: C63 C68 E21 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2011-06-24
New Economics Papers: this item is included in nep-cmp and nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Computing Dynamic Heterogeneous-Agent Economies: Tracking the Distribution (2020)
Software Item: Code for "Computing Dynamic Heterogeneous-Agent Economies: Tracking the Distribution" (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:11-018

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