An endogenous gridpoint method for distributional dynamics
Abstract
Modeling continuous choices in heterogeneous agent models as “lotteries” over a discretized state space is standard practice (Young, 2010), but renders the distributional dynamics linear in optimal policies. We present a novel, simple method that captures nonlinearities and solves the distributional dynamics with interpolation instead of integration using the idea of an endogenous grid. Our approach solves for a stationary equilibrium as quickly as the lottery method for a given precision, outperforms it for linear dynamics, and accommodates nonlinear dynamics and aggregate risk. We demonstrate its efficacy by studying a model with aggregate investment risk with a third-order perturbation solution.
Fields of Study & Subjects
Complex Systems and Time Series Analysis
Economic theories and models
Game Theory and Applications
Publication details
- Journal / source
- Journal of Monetary Economics
- Publisher
- Elsevier BV
- Volume
- 158
- Pages
- 103895–103895
- Publication date
- 15 January 2026
- Language
- EN