Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244319 
Year of Publication: 
2021
Series/Report no.: 
Working Paper No. 2021-16
Publisher: 
Federal Reserve Bank of Atlanta, Atlanta, GA
Abstract: 
We propose a general simulation-based procedure for estimating the quality of approximate policies in heterogeneous-agent equilibrium models, which allows verification that such approximate solutions describe a near-rational equilibrium. Our procedure endows agents with superior knowledge of the future path of the economy, while imposing a suitable penalty for such foresight. The relaxed problem is more tractable than the original, and it results in an upper bound on agents' welfare. Our method is general and straightforward to implement, and it can be used in conjunction with various solution algorithms. We illustrate our approach in two applications: the incomplete-markets model of Krusell and Smith (1998) and the heterogeneous firm model of Khan and Thomas (2008).
Subjects: 
numerical solutions
accuracy
approximations
simulations
JEL: 
C86
D52
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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