The endogenous grid method for discrete-continuous dynamic choice models with (or without) taste shocks

Iskhakov, Fedor; Jørgensen, Thomas Høgholm; Rust, John; Schjerning, Bertel

doi:10.3982/qe643

Cited by 79 publications

(65 citation statements)

References 32 publications

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“…We handle the discrete-choice options in the recursive problem according to the approach suggested by Iskhakov et al (2017), keeping for simplicity the same notation for functions V (·) and v(·). More specifically, we consider the addition of a random com-ponent to the valuation of discrete-choice options, and assume that this component is distributed according to an extreme-value (type I) distribution so that V j (a j , h j , s j , η j ) = max…”

Section: The Recursive Formulationmentioning

confidence: 99%

“…The standard deviation of taste shocks for the discrete choice, σ , is set to a small value that adds smoothness to the discrete-choice part of the problem but prevents us from adding too much noise to the decision problem. See Iskhakov et al (2017). Table 8 displays the country-specific pension parameters that we use as inputs when we calibrate the pay-as-you-go component of the pension systems based on the information available in OECD (2007).…”

Section: B Appendix On the Calibrationmentioning

confidence: 99%

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Differences in Euro-Area Household Finances and their Relevance for Monetary-Policy Transmission

Hintermaier

Koeniger

2019

SSRN Journal

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This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and house prices in the four largest economies in the euro area: France, Germany, Italy, and Spain. We first calibrate a life-cycle incomplete-markets model with a liquid financial asset and illiquid housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of consumption to changes in the real interest rate and in house prices differ substantially across the analyzed countries, and across age groups within these countries. The different consumption responses quantified in this paper point towards important heterogeneity in monetary-policy transmission within the euro area.

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Section: The Recursive Formulationmentioning

confidence: 99%

Section: B Appendix On the Calibrationmentioning

confidence: 99%

Differences in Euro-Area Household Finances and their Relevance for Monetary-Policy Transmission

Hintermaier

Koeniger

2019

SSRN Journal

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“…Similar to Barillas and Fernández-Villaverde (2007), Hintermaier and Koeniger (2010), , Iskhakov, Jørgensen, Rust, and Schjerning (2017), and especially Fella (2014), the endogenous grid points method originally developed by Carroll (2006) can thus be nested inside a value function iteration algorithm, with a grid search for the optimal debt choice, speeding up the solution algorithm. 15 The full solution algorithm is presented in the Appendix.…”

Section: Solution Algorithmmentioning

confidence: 99%

Precautionary borrowing and the credit card debt puzzle

Druedahl¹,

Jørgensen²

2018

Quantitative Economics

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This paper addresses the credit card debt puzzle using a generalization of the buffer‐stock consumption model with long‐term revolving debt contracts. Closely resembling actual US credit card law, we assume that card issuers can always deny their cardholders access to new debt, but that they cannot demand immediate repayment of the outstanding balance. Hereby, current debt can potentially soften a household's borrowing constraint in future periods, and thus provides extra liquidity. We show that for some intermediate values of liquid net worth it is indeed optimal for households to simultaneously hold positive gross debt and positive gross assets even though the interest rate on the debt is much higher than the return rate on the assets. Including a risk of being excluded from new borrowing which is positively correlated with unemployment, we are able to simultaneously explain a substantial share of the observed borrower‐saver group and match a broad range of percentiles from the empirical distributions of credit card debt and liquid assets.

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“…We briefly describe in this appendix how we deal with this potential non-concavity. An alternative would be to follow the method in Iskhakov et al (2017).…”

Section: Solution Methodsmentioning

confidence: 99%

Aggregating Elasticities: Intensive and Extensive Margins of Female Labour Supply

Attanasio¹,

Levell²,

Low³

et al. 2015

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We estimate labour supply elasticities at the micro level and show what we can learn from possibly very heterogeneous elasticities for aggregate behaviour. We consider both intertemporal and intratemporal choices, and identify intensive and extensive responses in a consistent lifecycle framework, using US CEX data. There is substantial heterogeneity in how individuals respond to wage changes at all margins, both due to observables, such as age, wealth, hours worked and the wage level as well as to unobservable tastes for leisure. We estimate the distribution of Marshallian elasticities for hours worked to have a median value of 0.18, and corresponding Hicksian elasticities of 0.54 and Frisch elasticities of 0.87. At the 90th percentile, these values are 0.79, 1.16, and 1.92. Responses at the extensive margin are important, explaining about 54% of the total labour supply response for women under 30, although this importance declines with age. We show that aggregate elasticities are cyclical, being larger in recessions and particularly so in long recessions. This heterogeneity at the micro level means that the aggregate labour supply elasticity is not a structural parameter: any aggregate elasticity will depend on the demographic structure of the economy as well as the distribution of wealth and the particular point in the business cycle.

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The endogenous grid method for discrete-continuous dynamic choice models with (or without) taste shocks

Cited by 79 publications

References 32 publications

Differences in Euro-Area Household Finances and their Relevance for Monetary-Policy Transmission

Differences in Euro-Area Household Finances and their Relevance for Monetary-Policy Transmission

Precautionary borrowing and the credit card debt puzzle

Aggregating Elasticities: Intensive and Extensive Margins of Female Labour Supply

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