Solving the Incomplete Markets Model With Aggregate Uncertainty Using Explicit Aggregation

Wouter J. Den Haan*, Pontus Rendahl

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review


We propose a method to solve models with heterogeneous agents and aggregate uncertainty. The law of motion describing aggregate behavior is obtained by explicitly aggregating the individual policy rule. The algorithm is simpler and faster than existing algorithms that rely on parameterization of the cross-sectional distribution and/or a computationally intensive simulation step. Explicit aggregation establishes a link between the individual policy rule and the set of necessary aggregate state variables, an insight that can be helpful in determining what state variables to include in other algorithms as well.

Original languageEnglish
JournalJournal of Economic Dynamics and Control
Issue number1
Pages (from-to)69-78
Number of pages10
Publication statusPublished - Jan 2010
Externally publishedYes


  • Numerical solutions
  • Projection methods

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