https://macropaperwarehouse.com/authors/m.-weiss/M. WeissHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/an-endogenous-gridpoint-method-for-distributional-dynamics/https://macropaperwarehouse.com/papers/an-endogenous-gridpoint-method-for-distributional-dynamics/<p>This paper introduces the Distributional Endogenous Gridpoint Method (DEGM), a novel numerical technique for solving the distributional dynamics that arise in heterogeneous agent macroeconomic models. The core problem is how to efficiently update the distribution of agents over the state space as the economy evolves. The dominant existing approach — the &ldquo;lottery method&rdquo; of Young (2010) — discretizes the state space and represents policy functions as lotteries over nearby gridpoints, producing a transition matrix that is linear in optimal policies. This linearity renders the lottery method incapable of capturing nonlinear effects in distributional dynamics, a limitation that becomes quantitatively significant for higher-order perturbation solutions.</p>