Scandinavian Working Papers in Economics
Working Papers,
Copenhagen Business School, Department of Economics
No 13-2020: Aggregating Heterogeneous-Agent Models with Permanent Income Shocks
Karl Harmenberg ()
Additional contact information
Karl Harmenberg: Department of Economics, Copenhagen Business School, Postal: Copenhagen Business School, Department of Economics, Porcelaenshaven 16 A. 1. floor, DK-2000 Frederiksberg, Denmark
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.
Keywords: Permanent income; Consumption; Simulation
17 pages, September 21, 2020
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