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Faculty of Economics

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Den Haan, W. J. and Rendahl, P.

Solving the incomplete markets model with aggregate uncertainty using explicit aggregation

Journal of Economic Dynamics and Control

Abstract: We propose a method to solve models with heterogeneous agents and aggregate uncertainty. The law of motion describing aggregate behavior is obtained by explicitly aggregating the individual policy rule. The algorithm is simpler and faster than existing algorithms that rely on parameterization of the cross-sectional distribution and/or a computationally intensive simulation step. Explicit aggregation establishes a link between the individual policy rule and the set of necessary aggregate state variables, an insight that can be helpful in determining what state variables to include in other algorithms as well.

JEL Codes: C63, D52

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Papers and Publications

Recent Publications

Carvalho, V. M. and Grassi, B. Large Firm Dynamics and the Business Cycle American Economic Review [2019]

Faraglia, E., Marcet, A., Oikonomou, R. and Scott, A. Government Debt management: the Short and the Long of it Review of Economic Studies, accepted [2018]

Fruehwirth, J., Iyer, S. and Zhang, A. Religion and Depression in Adolescence Journal of Political Economy, forthcoming [2019]