Solving an incomplete markets model with a large cross-section of agents

Thomas M. Mertens and Kenneth Judd

Journal of Economic Dynamics and Control, 2018, vol. 91, issue C, 349-368

Abstract: This paper shows that perturbation methods can be applied to a DSGE model with incomplete markets and a finite but arbitrarily large number of heterogeneous agents. We develop a simple but general solution technique that handles many state and choice variables for each agent and thus has an extremely high-dimensional state space. The method is based on perturbations around a point at which the solution is known. The novel idea is to exploit the symmetry of the problem to overcome the curse of dimensionality. We use the analysis to demonstrate the impact of heterogeneity on macroeconomic quantities and the pricing of risk. Furthermore, we set our technique apart from standard methods used in the literature.

Keywords: Perturbation methods; Incomplete markets; Heterogeneity (search for similar items in EconPapers)
JEL-codes: C02 C60 E44 G12 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:91:y:2018:i:c:p:349-368

DOI: 10.1016/j.jedc.2018.01.025

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