Solving a large heterogeneous-agent general equilibrium model with labour market frictions

In this paper we build and solve a heterogeneous-agent dynamic stochastic general equilibrium (DSGE) model with incomplete markets in the spirit of Krussel and Smith (1998). We expand this model to account for search and matching labour market frictions, using the classic Mortensen and Pissarides (1994) framework. The model, therefore, combines two important strands of economic modelling and presents a numerical challenge in terms of solving the model due to the inclusion of additional dimensions in the optimization problem. Despite the addition of additional state variables and higher dimensionality, we show that we are able to efficiently solve it numerically using value function iteration and we document basic properties of the model.