Open AccessSolving discrete time heterogeneous agent models with aggregate risk and many idiosyncratic states by perturbation
Author(s) -
Bayer Christian,
Luetticke Ralph
Publication year - 2020
Publication title -
quantitative economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.062
H-Index - 27
eISSN - 1759-7331
pISSN - 1759-7323
DOI - 10.3982/qe1243
Subject(s) - aggregate (composite) , perturbation (astronomy) , discrete time and continuous time , systematic risk , mathematical economics , general equilibrium theory , mathematics , computer science , econometrics , economics , physics , microeconomics , statistics , materials science , quantum mechanics , composite material
This paper describes a method for solving heterogeneous agent models with aggregate risk and many idiosyncratic states formulated in discrete time. It extends the method proposed by Reiter (2009) and complements recent work by Ahn, Kaplan, Moll, Winberry, and Wolf (2017) on how to solve such models in continuous time. We suggest first solving for the stationary equilibrium of the model without aggregate risk. We then write the functionals that describe the dynamic equilibrium as sparse expansions around their stationary equilibrium counterparts. Finally, we use the perturbation method of Schmitt‐Grohé and Uribe (2004) to approximate the aggregate dynamics of the model.