Market Clearing and Krusell-Smith Algorithm in an Economy with Multiple Assets

Abstract This paper proposes a novel method to compute the Krusell and Smith (1997, 1998) algorithm, used for solving heterogeneous-agents models with aggregate risk incomplete markets when households can save in more than one asset. When solve model asset, standard algorithm has impose equilibria each additional asset (find market-clearing price) period simulated. procedure entails root-finding period, which is computationally expensive. I show that it possible avoid at this level by not imposing but instead temporarily suspending market clearing. The proposed then updates law of motion prices using information on excess demand assets via Newton-like method. Since avoids time simulated, leads significant reduction computation time. In example two assets, version an 80% decrease computational time, even measured conservatively. potentially useful computing general equilibrium asset-pricing risky safe featuring both uninsurable idiosyncratic risk, since methods use linearisation neighborhood steady state are considered be less accurate global solution such models.