Inequality Constraints and Euler Equation based Solution Methods
Preprint
Repository URI
Repository DOI
Change log
Authors
Rendahl, P.
Abstract
Solving dynamic models with inequality constraints poses a challenging problem for two major reasons: dynamic programming techniques are reliable but often slow, while Euler equation based methods are fast but have problematic or unknown convergence properties. This paper attempts to bridge this gap. I show that a common iterative procedure on the Euler equation { usually referred to as time iteration { delivers a sequence of approximate policy functions that converges to the true solution under a wide range of circumstances. These circumstances extend to an arbitrarily large, but nite, set of endogenous and exogenous state-variables as well as a very broad spectrum of occasionally binding constraints.
Description
Keywords
Time iteration
Is Part Of
Publisher
Faculty of Economics