Favilukis, Jack, Ludvigson, Sydney C., Lynch, Anthony, Sargent, Thomas J. and Van Nieuwerburgh, Stijn (2007) An algorithm to solve heterogenous agent models with aggregate uncertainty. . (Unpublished)
Abstract
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.
| Item Type: | Monograph (Working Paper) |
|---|---|
| Additional Information: | © 2007 The Authors |
| Library of Congress subject classification: | H Social Sciences > HB Economic Theory |
| Journal of Economic Literature Classification System: | D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D58 - Computable and Other Applied General Equilibrium Models |
| Sets: | Departments > Finance Collections > Economists Online |
| Rights: | http://www.lse.ac.uk/library/rights/LSERO.htm |
| URL: | http://eprints.lse.ac.uk/43133/ |
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