Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/274596 
Authors: 
Year of Publication: 
2023
Series/Report no.: 
IHS Working Paper No. 49
Publisher: 
Institut für Höhere Studien - Institute for Advanced Studies (IHS), Vienna
Abstract: 
This paper develops a method to compute second-order perturbations of discretetime heterogeneous agent models. It addresses the three main tasks to make secondorder approximations tractable: state reduction, generating sufficient smoothness, and fast computation of the quadratic terms in the perturbation solution. The method is applied to a model with divisible labor, one with indivisible labor, and to an OLG model with stochastic aging. Compared to a linearized solution, second-order perturbations achieve substantially higher accuracy if models are subject to large or medium-sized aggregate shocks. They also capture precautionary behavior with respect to aggregate shocks. A general method of state reduction is developed, called "conditional-expectations approach". In the example models, it performs better in terms of accuracy and reliability than alternative approaches.
Subjects: 
heterogeneous agents
model reduction
perturbation methods
JEL: 
C63
C68
E21
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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