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Title: Solving heterogeneous agent models in discrete time with many idiosyncratic states by perturbation methods

Author(s): Christian Bayer and Ralph Luetticke

Publication Date: July 2018

Keyword(s): Heterogeneous Agent Models, incomplete markets, linearization and Numerical Methods

Programme Area(s): Monetary Economics and Fluctuations

Abstract: This paper describes a method for solving heterogeneous agent models with aggregate risk and many idiosyncratic states formulated in discrete time. It extends the method proposed by Reiter (2009) and complements recent work by Ahn et al. (2017) on how to solve such models in continuous time. We suggest first solving for the stationary equilibrium of the model without aggregate risk. We then write the functionals that describe the dynamic equilibrium as sparse expansions around their stationary equilibrium counterparts. Finally we use the perturbation method of Schmitt-Grohé and Uribe (2004) to approximate the aggregate dynamics of the model.

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Bibliographic Reference

Bayer, C and Luetticke, R. 2018. 'Solving heterogeneous agent models in discrete time with many idiosyncratic states by perturbation methods'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13071