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Solving the incomplete market model with aggregate uncertainty using a perturbation method

Sunghyun Kim (), Robert Kollmann () and Jinill Kim ()

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 1, 50-58

Abstract: We use a perturbation method to solve the incomplete markets model with aggregate uncertainty described in den Haan et al. [Computational suite of models with heterogeneous agents: incomplete markets and model uncertainty. Journal of Economic Dynamics & Control, this issue]. To apply that method, we use a "barrier method" to replace the original problem with occasionally binding inequality constraints by one with only equality constraints. We replace the structure with a continuum of agents by a setting in which a single infinitesimal agent faces prices generated by a representative-agent economy. We also solve a model variant with a large (but finite) number of agents. Our perturbation-based method is much simpler and faster than other methods.

Keywords: Heterogeneous; agents; Occasionally; binding; inequality; constraints; Barrier; method (search for similar items in EconPapers)
Date: 2010
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Handle: RePEc:eee:dyncon:v:34:y:2010:i:1:p:50-58