Dynare forums

Hello,
do somebody know if it is possible to a have a model like Krusell-Smith (1998) by using Dynare (and a program mother file)? So basically to have a specific unemployment status for each agent.
Thank you
Andrea

Dear Andrea,

Right now there is no straightforward way to implement Krusell and Smith (1998) into Dynare. We have a paper in which we have implemented this about three years ago (I attach the document to this message). You will not be able to do this in a single Dynare file. For this you need to write an external Matlab file in which you approximate the aggregate law of motion. Then in the Dynare file, you will solve the individual agent's optimization problem for a given aggregate law of motion.

We found that our approach works fine for the simple model described in the Krusell and Smith paper under the condition that the size of the shocks are relatively small. As soon as the shocks are larger, the solution of the model will be more difficult. This makes perfectly sense, since we are using local perturbation methods, while Krusell and Smith use global methods (value function iteration).

I have also attempted some time ago to extend the model to the case with unemployment, but found that the solution algorithm described in the attached paper is not converging.

Regards,

Tarik Ocaktan

Thank you very much