Aggregating Heterogeneous-Agent Models with Permanent Income Shocks

Karl Harmenberg*

*Corresponding author for this work

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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.
Original languageEnglish
Article number104185
JournalJournal of Economic Dynamics and Control
Number of pages27
Publication statusPublished - Aug 2021

Bibliographical note

Published online: 24. June 2021

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