Reiter, MichaelORCID: https://orcid.org/0000-0001-9490-8746
(August 2023)
State Reduction and Second-order Perturbations of Heterogeneous Agent Models.
IHS Working Paper Series 49,
43 p.
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Abstract
This paper develops a method to compute second-order perturbations of discretetime heterogeneous agent models. It addresses the three main tasks to make second-order approximations tractable: state reduction, generating sufficient smoothness, and fast computation of the quadratic terms in the perturbation solution. The method is applied to a model with divisible labor, one with indivisible labor, and to an OLG model with stochastic aging. Compared to a linearized solution, second-order perturbations achieve substantially higher accuracy if models are subject to large or medium-sized aggregate shocks. They also capture precautionary behavior with respect to aggregate shocks. A general method of state reduction is developed, called ”conditional-expectations approach”. In the example models, it performs better in terms of accuracy and reliability than alternative approaches.
Item Type: | IHS Series |
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Additional Information (public): | Including an Online-Appendix of 21 pages. |
Keywords: | heterogeneous agents, model reduction, perturbation methods |
Funders: | Anniversary Fund, Austrian National Bank (OeNB - grant number 17815) |
Classification Codes (e.g. JEL): | C63, C68, E21 |
Research Units: | Current Research Groups > Macroeconomics and Business Cycles |
Related URLs: | |
Date Deposited: | 21 Aug 2023 10:05 |
Last Modified: | 07 Dec 2023 09:15 |
URI: | https://irihs.ihs.ac.at/id/eprint/6641 |
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