Solving the Incomplete Markets Model with Aggregate Uncertainty using Explicit Aggregation

Wouter Den Haan and Pontus Rendahl ()
Authors registered in the RePEc Author Service: Wouter Denhaan ()

No 6963, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We construct a method to solve models with heterogeneous agents and aggregate uncertainty that is simpler than existing algorithms; the aggregate law of motion is obtained neither by simulation nor by parameterization of the cross-sectional distribution, but by explicitly aggregating the individual policy rule. This establishes a link between the individual policy rule and the set of necessary aggregate state variables. In particular, the cross-sectional average of each basis function in the individual policy rule is a state variable. That is, if the individual capital stock, k, (or k²) enters the policy function then the mean of k (or the mean of k²) is a state variable. The laws of motions for these aggregate state variables are obtained by explicit aggregation of separate individual policy functions for the different elements.

Keywords: Numerical solutions; Projection methods (search for similar items in EconPapers)
JEL-codes: C63 D52 (search for similar items in EconPapers)
Date: 2008-09
New Economics Papers: this item is included in nep-cba, nep-cmp and nep-dge
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Citations: View citations in EconPapers (2)

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Journal Article: Solving the incomplete markets model with aggregate uncertainty using explicit aggregation (2010)
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