Exploiting MIT Shocks in Heterogeneous-Agent Economies: The Impulse Response as a Numerical Derivative / Timo Boppart, Per Krusell, Kurt Mitman.

Format:

Book

Author/Creator:

Boppart, Timo.

Contributor:

National Bureau of Economic Research.

Krusell, Per.

Mitman, Kurt.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24138.

NBER working paper series no. w24138

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Exploiting MIT Shocks in Heterogeneous-Agent Economies

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

We propose a new method for computing equilibria in heterogeneous-agent models with aggregate uncertainty. The idea relies on an assumption that linearization offers a good approximation; we share this assumption with existing linearization methods. However, unlike those methods, the approach here does not rely on direct derivation of first-order Taylor terms. It also does not use recursive methods, whereby aggregates and prices would be expressed as linear functions of the state, usually a very high-dimensional object (such as the wealth distribution). Rather, we rely merely on solving nonlinearly for a deterministic transition path: we study the equilibrium response to a single, small "MIT shock'' carefully. We then regard this impulse response path as a numerical derivative in sequence space and hence provide our linearized solution directly using this path. The method can easily be extended to the case of many shocks and computation time rises linearly in the number of shocks. We also propose a set of checks on whether linearization is a good approximation. We assert that our method is the simplest and most transparent linearization technique among currently known methods. The key numerical tool required to implement it is value-function iteration, using a very limited set of state variables.

Notes:

Print version record

December 2017.