Computing the distribution: Adaptive finite volume methods for economic models with heterogeneous agents
- SeHyoun Ahn
- Working Paper
Solving economic models with heterogeneous agents requires computing aggregate dynamics consistent with individual behaviours. This paper introduces the ﬁnite volume method from the mathe-matics literature to enlarge the set of numerical methods available to compute dynamics in continuous time. Finite volume discretization methods allow theoretically consistent dimensional and local adaptivity that guarantee the mass conservation and positivity of the distribution function of the discretized system. This paper shows examples of 1) the Ornstein-Uhlenbeck process 2) the Aiyagari-Bewley-Huggett (wealth+income heterogeneity) model and 3) the lifecycle (wealth+income+age heterogeneity) model. The numerical exercises show that for the current dimensionality of the problems in economics, the ﬁnite volume method (with or without adaptivity) outperforms pre-existing methods. This paper further provides a companion open-source implementation of the ﬁnite volume method at github.com/sehyoun/adaptive_finite_volume to reduce the testing time of the ﬁnite volume method.
Norges Bank’s Working Papers present research projects and reports that are generally not in their final form. Other analyses by Norges Bank’s economists are also included in the series. The views and conclusions in these documents are those of the authors.
ISSN 1502-8143 (online)