DP7019 Comparison of Solutions to the Incomplete Markets Model with Aggregate Uncertainty

Author(s): Wouter Den Haan
Publication Date: October 2008
Keyword(s): approximations, numerical solutions
JEL(s): C63
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7019

This paper compares numerical solutions to the model of Krusell and Smith (1998) generated by different numerical algorithms. The algorithms have very similar implications for the correlations between different variables. Larger differences are observed for (i) the unconditional means and standard deviations of individual variables, (ii) the behavior of individual agents during particularly bad times, (iii) the volatility of the per capita capital stock, and (iv) the behavior of the higher-order moments of the cross-sectional distribution. For example, the two algorithms that differ the most from each other generate individual consumption series that have an average (maximum) difference of 1.6% (11.4%). Several outcomes of this comparison project should be useful in using these and other algorithms in future work.