Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/184778 
Year of Publication: 
2017
Series/Report no.: 
Working Paper No. 827
Publisher: 
Queen Mary University of London, School of Economics and Finance, London
Abstract: 
Non-stationary income processes are standard in quantitative life-cycle models, prompted by the observation that within-cohort income inequality increases with age. This paper generalizes Tauchen (1986) and Rouwenhorst's (1995) discretization methods to non-stationary AR(1) processes. We evaluate the performance of both methods in the context of a canonical finite-horizon, income-uctuation problem with a non-stationary income process. We find that the generalized Rouwenhorst's method performs extremely well even with a relatively small number of states.
Subjects: 
Numerical methods
finite state approximations
JEL: 
C63
Document Type: 
Working Paper

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