Approximate and Almost-Exact Aggregation in Dynamic Stochastic Heterogeneous-Agent Models

Reiter, Michael (October 2010) Approximate and Almost-Exact Aggregation in Dynamic Stochastic Heterogeneous-Agent Models. IHS Economics Series 258

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Abstract: The paper presents a new method to solve DSGE models with a great number of heterogeneous agents. Using tools from systems and control theory, it is shown how to reduce the dimension of the state and the policy vector so that the reduced model approximates the original model with high precision. The method is illustrated with a stochastic growth model with incomplete markets similar to Krusell and Smith (1998), and with a model of heterogeneous firms with state-dependent pricing. For versions of those models that are nonlinear in individual variables, but linearized in aggregate variables, approximations with 50 to 200 state variables deliver solutions that are precise up to machine precision. The paper also shows how to reduce the state vector even further, with a very small reduction in precision.;

Item Type: IHS Series
Keywords: 'Heterogeneous agents' 'Aggregation' 'Model reduction'
Classification Codes (e.g. JEL): C63, C68, E21
Status: Published
Date Deposited: 26 Sep 2014 10:39
Last Modified: 22 Jul 2017 05:46
URI: http://irihs.ihs.ac.at/id/eprint/2021

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