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SOLVING DYNAMIC MODELS WITH AGGREGATE SHOCKS AND HETEROGENEOUS AGENTS

Published online by Cambridge University Press:  02 March 2005

WOUTER J. DEN HAAN
WOUTER J. DEN HAAN
Affiliation:
University of California at San Diego and National Bureau of Economic Research
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Extract

I develop an algorithm for solving dynamic models in which individual decision rules and the cross-sectional distribution of agents' characteristics influence each other. To illustrate the algorithm, I solve an endowment economy with incomplete markets, a continuum of heterogeneous agents, and aggregate shocks. The key innovation of the algorithm is to parameterize the (cross-sectional) density with a flexible functional form, which makes it possible to avoid simulation techniques. The paper shows how to check for accuracy and establishes links between the properties of the incomplete-markets economy and the aspects involved in obtaining a numerical solution.

Keywords

Dynamic ModelsAggregate ShocksHeterogeneous Agents
Type
Research Article
Information
Macroeconomic Dynamics , Volume 1 , Issue 2 , June 1997 , pp. 355 - 386
Copyright
© 1997 Cambridge University Press

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