Work

An endogenous gridpoint method for distributional dynamics

Year: 2026

Type: article

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.

Source: Journal of Monetary Economics

DOI: 10.1016/j.jmoneco.2026.103895

Authors: Christian Bayer, Ralph Luetticke, Maximilian Weiss, Yannik Winkelmann

Institutions: University of Bonn, IZA - Institute of Labor Economics, University of Tübingen

Language: English

Topic: Economic theories and models

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $4,660

Funders: European Commission, Deutsche Forschungsgemeinschaft, European Research Council, H2020 European Research Council