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An algorithm to solve heterogenous agent models with aggregate uncertainty

Favilukis, Jack and Ludvigson, Sydney C. and Lynch, Anthony and Sargent, Thomas J. and Van Nieuwerburgh, Stijn (2007) An algorithm to solve heterogenous agent models with aggregate uncertainty. . (Unpublished)

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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
Subjects: H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D58 - Computable and Other Applied General Equilibrium Models
Sets: Departments > Finance
Collections > Economists Online
Date Deposited: 16 Apr 2012 14:33
Last Modified: 16 Apr 2012 14:33
URI: http://eprints.lse.ac.uk/id/eprint/43133

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