Solving the incomplete markets model with aggregate uncertainty by backward induction

Michael Reiter

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
Pages (from-to)28-35
Number of pages8
JournalJournal of Economic Dynamics and Control
Volume34
Issue number1
DOIs
StatePublished - Jan 2010

Keywords

  • Backward induction
  • Heterogeneous agents

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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