Solving the incomplete markets model with aggregate uncertainty using parameterized cross-sectional distributions

Abstract

a b s t r a c tThis note describes how the incomplete markets model with aggregate uncertainty in Den Haan et al. [Comparison of solutions to the incomplete markets model with aggregate uncertainty. Journal of Economic Dynamics and Control, this issue] is solved using standard quadrature and projection methods. This is made possible by linking the aggregate state variables to a parameterized density that describes the cross-sectional distribution. A simulation procedure is used to find the best shape of the density within the class of approximating densities considered. This note compares several simulation procedures in which there is-as in the model-no cross-sectional sampling variation.

Solving the Diamond-Mortensen-Pissarides model accurately

“…Most prior studies compare different solution methods for the stochastic growth model and its extensions. Prominent examples include Aruoba, Fernández-Villaverde, and Rubio-Ramírez (2006), Caldara, Fernández-Villaverde, Rubio-Ramírez, andYao (2012), andLevintal (2016) for the baseline stochastic growth model, Algan, Allais, and Den Haan (2010), Den Haan and Rendahl (2010), and Maliar, Maliar, and Valli (2011) for the incomplete markets model with heterogenous agents and aggregate uncertainty, as well as Kollmann, Maliar, Malin, and Pichler (2011), Maliar, Maliar, and Judd (2011), Malin, Krueger, and Kubler (2011 for the multicountry real business cycle model. We are not aware of any prior studies that compare solution methods for the DMP model.…”

Alternative Methods for Solving Heterogeneous Firm Models

“…See, among others, Algan et al. (), Algan, Allais, and Den Haan (, ), Den Haan and Rendahl (), Den Haan (), Maliar, Maliar, and Valli (), Reiter (), and Young ().…”

Comparison of solutions to the incomplete markets model with aggregate uncertainty

“…Those are the backward induction procedure, referred to as BInduc throughout this paper, developed in Reiter (2009b), the parameterized distribution procedure, referred to as Param, of Algan et al (2009), and the explicit aggregation algorithm, referred to as Xpa, developed in den Haan and Rendahl (2009). These algorithms are summarized in the subsections on projection methods.…”