Solving the incomplete market model with aggregate uncertainty using a perturbation method

Sunghyun Henry Kim, Robert Kollmann, Jinill Kim

Research output: Contribution to journalArticlepeer-review

19 Citations (Scopus)

Abstract

We use a perturbation method to solve the incomplete markets model with aggregate uncertainty described in den Haan et al. [Computational suite of models with heterogeneous agents: incomplete markets and model uncertainty. Journal of Economic Dynamics & Control, this issue]. To apply that method, we use a "barrier method" to replace the original problem with occasionally binding inequality constraints by one with only equality constraints. We replace the structure with a continuum of agents by a setting in which a single infinitesimal agent faces prices generated by a representative-agent economy. We also solve a model variant with a large (but finite) number of agents. Our perturbation-based method is much simpler and faster than other methods.

Original languageEnglish
Pages (from-to)50-58
Number of pages9
JournalJournal of Economic Dynamics and Control
Volume34
Issue number1
DOIs
Publication statusPublished - 2010 Jan
Externally publishedYes

Keywords

  • Barrier method
  • Heterogeneous agents
  • Occasionally binding inequality constraints

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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