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Applying Perturbation Methods to Incomplete Market Models with Exogenous Borrowing Constraints

Henry Kim, Jinill Kim () and Robert Kollmann ()
Authors registered in the RePEc Author Service: Sunghyun Henry Kim ()

No 504, Discussion Papers Series, Department of Economics, Tufts University from Department of Economics, Tufts University

Abstract: This paper solves an incomplete market model with infinite number of agents and exogenous borrowing constraints described in den Haan, Judd and Juillard (2004). We apply the idea of “barrier methods” to convert optimization problem with borrowing constraints as inequalities into a problem with equality constraints, and the converted model is solved by a second-order perturbation method. The simulation results of impulse responses and second moments match the standardized features of incomplete market models. Accuracy of the solution is in a reasonable range but significantly decreases when the economy is near the borrowing limit or moves away from the steady state.

Keywords: perturbation; barrier method; borrowing constraint; incomplete market; accuracy. (search for similar items in EconPapers)
JEL-codes: C63 C68 C88 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-cmp and nep-dge
Date: 2005
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