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State Reduction and Second-order Perturbations of Heterogeneous Agent Models
[working paper]
Corporate Editor
Institut für Höhere Studien (IHS), Wien
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 pertur... view more
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.... view less
Classification
Economic Statistics, Econometrics, Business Informatics
Free Keywords
heterogeneous agents; model reduction; perturbation methods
Document language
English
Publication Year
2023
City
Wien
Page/Pages
43 p.
Series
IHS Working Paper, 49
Status
Published Version; reviewed