Resource title

An algorithm to solve heterogenous agent models with aggregate uncertainty

Resource image

image for OpenScout resource :: An algorithm to solve heterogenous agent models with aggregate uncertainty

Resource description

General equilibrium models with heterogeneous agents are very difficult to solve because the wealth distribution, a multidimensional and infinite object, must be part of the state space. Krussell and Smith propose a numerical solution where the wealth distribution is summarized by its first moment. However, the volatility of equity in their model is unrealistically low. I show that markets do not clear in a model with more realistic volatility if the wealth distribution is summarized by its first moment only. I propose an alternate algorithm where the wealth distribution is summarized by a finite set of probability density functions which come from simulating the model. This algorithm can solve both the Krussell and Smith model, as well the more volatile version.

Resource author

Resource publisher

Resource publish date

Resource language

en

Resource content type

Resource resource URL

http://eprints.lse.ac.uk/43133/

Resource license