An Endogenous Gridpoint Method for Distributional Dynamics

Christian Bayer, Ralph Luetticke, Maximilian Weiß and Yannik Winkelmann

No 19067, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Modeling continuous choices in heterogeneous agent models as "lotteries" over a discretized state space is standard practice (Young, 2010), but renders the distributional dynamics linear in optimal policies. We present a novel, simple method that captures nonlinearities and solves the distributional dynamics with interpolation instead of integration using the idea of an endogenous grid. Our approach solves for a stationary equilibrium as quickly as the lottery method for a given precision, outperforms it for linear dynamics, and accommodates nonlinear dynamics and aggregate risk. We demonstrate its efficacy by studying a model with aggregate investment risk with a third-order perturbation solution.

Keywords: Distributions; Numerical methods; Heterogeneous agents; Nonlinear effects (search for similar items in EconPapers)
JEL-codes: C46 C63 E32 (search for similar items in EconPapers)
Date: 2024-05
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Journal Article: An endogenous gridpoint method for distributional dynamics (2026)
Working Paper: An Endogenous Gridpoint Method for Distributional Dynamics (2024)
Working Paper: An Endogenous Gridpoint Method for Distributional Dynamics (2024)
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