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Aggregating heterogeneous-agent models with permanent income shocks

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  • Harmenberg, Karl

Abstract

I introduce a method for simulating aggregate dynamics of heterogeneous-agent models where log permanent income follows a random walk. The idea is to simulate the model using a counterfactual permanent-income-neutral measure which incorporates the effect that permanent income shocks have on macroeconomic aggregates. With the permanent-income-neutral measure, one does not need to keep track of the permanent-income distribution. The permanent-income-neutral measure is both useful for the analytical characterization of aggregate consumption-savings behavior and for simulating numerical models. Furthermore, it is trivial to implement with a few lines of code.

Suggested Citation

  • Harmenberg, Karl, 2021. "Aggregating heterogeneous-agent models with permanent income shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 129(C).
    • Handle: RePEc:eee:dyncon:v:129:y:2021:i:c:s0165188921001202
    DOI: 10.1016/j.jedc.2021.104185
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    More about this item

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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