Markov-Chain Approximations for Life-Cycle Models
2019
Non-stationary income processes are standard in quantitative life-cycle models, prompted by the observation that within-cohort income inequality increases with age. This paper generalizes Tauchen (1986) and Rouwenhorst's (1995) discretization methods to non-stationary AR(1) processes. We evaluate the performance of both methods in the context of a canonical finite-horizon, income-uctuation problem with a non-stationary income process. We find that the generalized Rouwenhorst's method performs extremely well even with a relatively small number of states.
Keywords:
- Correction
- Source
- Cite
- Save
- Machine Reading By IdeaReader
42
References
1
Citations
NaN
KQI