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Exploiting MIT Shocks in Heterogeneous-Agent Economies: The Impulse Response as a Numerical Derivative
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.ORCID iD: 0000-0002-0212-255X
2018 (English)In: Journal of Economic Dynamics and Control, ISSN 0165-1889, E-ISSN 1879-1743, Vol. 89, p. 68-92Article in journal (Refereed) Published
Abstract [en]

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.

Place, publisher, year, edition, pages
2018. Vol. 89, p. 68-92
Keywords [en]
Heterogeneous agents, Computation, Linearization, MIT Shock
National Category
Economics and Business
Research subject
Economics
Identifiers
URN: urn:nbn:se:su:diva-165395DOI: 10.1016/j.jedc.2018.01.002OAI: oai:DiVA.org:su-165395DiVA, id: diva2:1283106
Available from: 2019-01-28 Created: 2019-01-28 Last updated: 2019-02-18Bibliographically approved

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Boppart, TimoKrusell, PerMitman, Kurt
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