Arellano (2008) Default model

Lectures
1

Hello,
I am reading the Python codes replicating Arellano (2008) in the series of Quant lecture
Link for the code: https://lectures.quantecon.org/py/arellano.html

There are some codes I could not understand,

  1. Allocate memory

     self.Vd = np.zeros(ny)
 self.Vc = np.zeros((ny, nB))
 self.V = np.zeros((ny, nB))
 self.Q = np.ones((ny, nB)) * .95  # Initial guess for prices
 self.default_prob = np.empty((ny, nB))

 # Compute the value functions, prices, and default prob
 self.solve(tol=tol, maxit=maxit)
 # Compute the optimal savings policy conditional on no default
 self.compute_savings_policy()

    def solve(self, tol=1e-8, maxit=10000):
    # Iteration Stuff
    it = 0
    dist = 10.

     # Alloc memory to store next iterate of value function
 V_upd = np.zeros((self.ny, self.nB))

 # == Main loop == #
 while dist > tol and maxit > it:

     # Compute expectations for this iteration
     Vs = self.V, self.Vd, self.Vc
     EV, EVd, EVc = (self.Py @ v for v in Vs)

     # Run inner loop to update value functions Vc and Vd.
     # Note that Vc and Vd are updated in place.  Other objects
     # are not modified.
     _inner_loop(self.ygrid, self.def_y,
                 self.Bgrid, self.Vd, self.Vc,
                 EVc, EVd, EV, self.Q,
                 self.β, self.θ, self.γ)

I do not understand what “inner_loop” actually do here? I googled but could not find this syntax.

  1. Update prices

Vd_compat = np.repeat(self.Vd, self.nB).reshape(self.ny, self.nB)
default_states = Vd_compat > self.Vc

I don’t know what will be returned from “default_states= Vd > Vc”? I guess it is kind of a matrix which assign 1 for position whose element in Vd is greater than Vc, and 0 other wise; but I am not so sure, I searched but could not find similar code to see its meaning.

Is there anyone having an idea?

Any help is really appreciated.

Thank you!

2

Hi @sunflower2010

  1. _inner_loop() is a function defined above that code, and acts like any other function.

  2. Using the > and < will return a Boolean, equal to either True or False. This can also be converted to 1 or 0. As these are arrays, it will act element-wise and look at each element in the array individually.

Hope that helps.

1 Like
4

Hi @natashawatkins

Thanks for your help.
I am still reading the code, and encounter another confusion.
I don’t know what is the value of "None " here? (the code is also from Arellano 2008, https://lectures.quantecon.org/py/arellano.html)

def simulate(self, T, y_init=None, B_init=None):
“”"
Simulate time series for output, consumption, B’

Thank you,

5

None is just another type of value - https://www.pythoncentral.io/python-null-equivalent-none/.

1 Like
6

Hi @natashawatkins,

Thanks for your help.
If possible, could you plz help me with this question now about simulation. I am totally lost when reading the simulation part. (Still in Arellano 2008 code).

I do not understand why we need to choose y_int and B_int are the index which near the mean of grid or near 0?

def simulate(self, T, y_init=None, B_init=None):
“”"
Simulate time series for output, consumption, B’.
“”"
# Find index i such that Bgrid[i] is near 0
zero_B_index = np.searchsorted(self.Bgrid, 0)

    if y_init is None:
        # Set to index near the mean of the ygrid
        y_init = np.searchsorted(self.ygrid, self.ygrid.mean())
    if B_init is None:
        B_init = zero_B_index
    # Start off not in default
    in_default = False

y_sim_indices = self.mc.simulate_indices(T, init=y_init)
B_sim_indices = np.empty(T, dtype=np.int64)
B_sim_indices[0] = B_init
q_sim = np.empty(T)
in_default_series = np.zeros(T, dtype=np.int64)