An Endogenous Gridpoint Method for Distributional Dynamics

Christian Bayer, Ralph Luetticke, Maximilian Weiss and Yannik Winkelmann

No 19067, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The "histogram method'' (Young, 2010), while the standard approach for analyzing distributional dynamics in heterogeneous agent models, is linear in optimal policies. We introduce a novel method that captures nonlinearities of distributional dynamics. This method solves the distributional dynamics by interpolation instead of integration, which is made possible by making the grid endogenous. It retains the tractability and speed of the histogram method, while increasing numerical efficiency even in the steady state and producing significant economic differences in scenarios with aggregate risk. We document this by studying aggregate investment risk with a third-order solution using perturbation techniques.

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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Working Paper: An Endogenous Gridpoint Method for Distributional Dynamics (2024)
Working Paper: An Endogenous Gridpoint Method for Distributional Dynamics (2024)
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