W.J. den Haan
- Solving the incomplete markets model with aggregate uncertainty using explicit aggregation
- Journal of Economic Dynamics & Control
- Volume | Issue number
- 34 | 1
- Pages (from-to)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
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.
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