Solving Heterogeneous Agent Models in Discrete Time with Many Idiosyncratic States by Perturbation Methods

52 Pages Posted: 31 Jul 2018 Last revised: 27 Jan 2020

See all articles by Christian Bayer

Christian Bayer

University of Bonn

Ralph Luetticke

University College London

Date Written: July 2018

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 et al. (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.

Keywords: Heterogeneous Agent Models, incomplete markets, linearization, Numerical Methods

JEL Classification: C63, E32

Suggested Citation

Bayer, Christian and Luetticke, Ralph, Solving Heterogeneous Agent Models in Discrete Time with Many Idiosyncratic States by Perturbation Methods (July 2018). CEPR Discussion Paper No. DP13071, Available at SSRN: https://ssrn.com/abstract=3222582

Christian Bayer (Contact Author)

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Ralph Luetticke

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

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