Alternative Methods for Solving Heterogeneous Firm Models

Stephen Terry

Journal of Money, Credit and Banking, 2017, vol. 49, issue 6, 1081-1111

Abstract: I implement and compare five solution methods for a benchmark heterogeneous firms model with lumpy capital adjustment and aggregate uncertainty. The Krusell–Smith algorithm performs best within a group of methods using projection in the aggregate states. Another technique, Parameterization plus Perturbation, is much faster and performs best within a group of methods using perturbation in aggregates. However, projection and perturbation have nonoverlapping strengths and weaknesses. I highlight the resulting trade‐offs with several model extensions. I recommend that researchers apply projection methods to cases with large shocks or nonlinear dynamics, while cases with explicitly distributional channels at work favor perturbation.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:49:y:2017:i:6:p:1081-1111

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