Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm

This paper studies the properties of the solution to the heterogeneous agents model in Den Haan et al. [2009. Computational suite of models with heterogeneous agents: incomplete markets and aggregate uncertainty. Journal of Economic Dynamics and Control, this issue]. To solve for the individual policy rules, we use an Euler-equation method iterating on a grid of pre-specified points. To compute the aggregate law of motion, we use the stochastic-simulation approach of Krusell and Smith [1998. Income and wealth heterogeneity in the macroeconomy. Journal of Political Economy 106, 868-896]. We also compare the stochastic- and non-stochastic-simulation versions of the Krusell-Smith algorithm, and we find that the two versions are similar in terms of their speed and accuracy.