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Solving discrete time heterogeneous agent models with aggregate risk and many idiosyncratic states by perturbation

Luetticke, R; Bayer, C; (2020) Solving discrete time heterogeneous agent models with aggregate risk and many idiosyncratic states by perturbation. Quantitative Economics , 11 (4) pp. 1253-1288. 10.3982/QE1243. Green open access

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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, Kaplan, Moll, Winberry, and Wolf (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.

Type: Article
Title: Solving discrete time heterogeneous agent models with aggregate risk and many idiosyncratic states by perturbation
Open access status: An open access version is available from UCL Discovery
DOI: 10.3982/QE1243
Publisher version: https://doi.org/10.3982/QE1243
Language: English
Additional information: This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10105229
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