Solving the incomplete markets model with aggregate uncertainty by backward induction |
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Authors: | Michael Reiter |
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Institution: | aInstitute for Advanced Studies, Stumpergasse 56, A-1060 Vienna, Austria |
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Abstract: | This paper describes a method to solve models with a continuum of agents, incomplete markets and aggregate uncertainty. I use backward induction on a finite grid of points in the aggregate state space. The aggregate state includes a small number of statistics (moments) of the cross-sectional distribution of capital. For any given set of moments, agents use a specific cross-sectional distribution, called “proxy distribution”, to compute the equilibrium. Information from the steady state distribution as well as from simulations can be used to chose a suitable proxy distribution. |
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Keywords: | Heterogeneous agents Backward induction |
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