Identification and Estimation of Heterogeneous Agent Models: A Likelihood Approach

43 Pages Posted: 5 Dec 2017  

Juan Carlos Parra-Alvarez

University of Aarhus - CREATES

Olaf Posch

Universität Hamburg, Department of Economics; CREATES

Mu‐Chun Wang

University of Hamburg - Faculty of Economics and Business Administration

Date Written: November 08, 2017

Abstract

In this paper, we study the statistical properties of heterogeneous agent models with incomplete markets. Using a Bewley-Hugget-Aiyagari model we compute the equilibrium density function of wealth and show how it can be used for likelihood inference. We investigate the identifiability of the model parameters based on data representing a large cross-section of individual wealth. We also study the finite sample properties of the maximum likelihood estimator using Monte Carlo experiments. Our results suggest that while the parameters related to the household’s preferences can be correctly identified and accurately estimated, the parameters associated with the supply side of the economy cannot be separately identified leading to inferential problems that persist even in large samples. In the presence of partially identification problems, we show that an empirical strategy based on fixing the value of one the troublesome parameters allows us to pin down the other unidentified parameter without compromising the estimation of the remaining parameters of the model. An empirical illustration of our maximum likelihood framework using the 2013 SCF data for the U.S. confirms the results from our identification experiments.

Keywords: heterogeneous agent models, continuous-time, Fokker-Planck equations, identification, maximum likelihood

JEL Classification: C100, C130, C630, E210, E240

Suggested Citation

Parra-Alvarez, Juan Carlos and Posch, Olaf and Wang, Mu‐Chun, Identification and Estimation of Heterogeneous Agent Models: A Likelihood Approach (November 08, 2017). CESifo Working Paper Series No. 6717. Available at SSRN: https://ssrn.com/abstract=3082119

Juan Carlos Parra-Alvarez (Contact Author)

University of Aarhus - CREATES ( email )

Department of Economics and Business
Fuglesangs Allé 4
Aarhus V, 8210
Denmark

Olaf Posch

Universität Hamburg, Department of Economics ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Mu‐Chun Wang

University of Hamburg - Faculty of Economics and Business Administration ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

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