Using the Sequence-Space Jacobian to Solve and Estimate Heterogeneous-Agent Models

Two-Asset HANK Model as a Directed Acyclical Graph

Abstract

We propose a general and highly efficient method for solving and estimating general equilibrium heterogeneous-agent models with aggregate shocks in discrete time. Our approach relies on the rapid computation of sequence-space Jacobian—the derivatives of perfect—foresight equilibrium mappings between aggregate sequences around the steady state. Our main contribution is a fast algorithm for calculating Jacobians for a large class of heterogeneous-agent problems. We combine this algorithm with a systematic approach to composing and inverting Jacobians to solve for general equilibrium impulse responses. We obtain a rapid procedure for likelihood-based estimation and computation of nonlinear perfect-foresight transitions. We apply our methods to three canonical heterogeneous-agent models: a neoclassical model, a New Keynesian model with one asset, and a New Keynesian model with two assets.

Publication
Resubmitted to Econometrica