Exploiting MIT Shocks in Heterogeneous-Agent Economies: The Impulse Response as a Numerical Derivative

Item Type Journal paper
Abstract We propose a new method for computing equilibria in heterogeneous-agent models with aggregate uncertainty. The idea relies on an assumption that linearization offers a good approximation; we share this assumption with existing linearization methods. However, unlike those methods, the approach here does not rely on direct derivation of first-order Taylor terms. It also does not use recursive methods, whereby aggregates and prices would be expressed as linear functions of the state, usually a very high-dimensional object (such as the wealth distribution). Rather, we rely merely on solving nonlinearly for a deterministic transition path: we study the equilibrium response to a single, small “MIT shock” carefully. We then regard this impulse response path as a numerical derivative in sequence space and hence provide our linearized solution directly using this path. The method can easily be extended to the case of many shocks and computation time rises linearly in the number of shocks. We also propose a set of checks on whether linearization is a good approximation. We assert that our method is the simplest and most transparent linearization technique among currently known methods. The key numerical tool required to implement it is value-function iteration, using a very limited set of state variables.
Authors Boppart, Timo; Krusell, Per & Mitman, Kurt
Journal or Publication Title Journal of Economic Dynamics & Control
Language English
Subjects economics
HSG Classification contribution to scientific community
HSG Profile Area None
Refereed Yes
Date 2018
Publisher Elsevier
Volume 89
Page Range 68-92
ISSN 0165-1889
Publisher DOI https://doi.org/10.1016/j.jedc.2018.01.002
Depositing User Prof. PhD Timo Boppart
Date Deposited 04 Dec 2020 13:52
Last Modified 20 Jul 2022 17:43
URI: https://www.alexandria.unisg.ch/publications/261583

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Boppart, Timo; Krusell, Per & Mitman, Kurt (2018) Exploiting MIT Shocks in Heterogeneous-Agent Economies: The Impulse Response as a Numerical Derivative. Journal of Economic Dynamics & Control, 89 68-92. ISSN 0165-1889

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https://www.alexandria.unisg.ch/id/eprint/261583
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