Dynamics of the Distribution Function

Abstract

This chapter presents methods for computing the dynamics of an economy that is populated by heterogeneous agents. The law of motion for the distribution of individual wealth is first computed in a model with individual uncertainty and subsequently in an economy with both individual and aggregate risk. To solve for the dynamics of the stochastic heterogeneous-agent neoclassical growth model, the algorithm developed by Krusell and Smith is described in detail. As two prominent applications from the literature, Heer and Maußner consider the welfare effects of business-cycle fluctuations and the cyclical dynamics of the income shares.