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%T State Reduction and Second-order Perturbations of Heterogeneous Agent Models %A Reiter, Michael %P 43 %V 49 %D 2023 %K heterogeneous agents; model reduction; perturbation methods %~ IHS (Wien) %> https://nbn-resolving.org/urn:nbn:de:0168-ssoar-90148-4 %X 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. %C AUT %C Wien %G en %9 Arbeitspapier %W GESIS - http://www.gesis.org %~ SSOAR - http://www.ssoar.info