Inequality Constraints and Euler Equation‐based Solution Methods
Accepted version
Peer-reviewed
Repository URI
Repository DOI
Change log
Authors
Karner Rendahl, Pontus https://orcid.org/0000-0003-3052-5732
Abstract
Solving dynamic models with inequality constraints poses a challenging problem for two major reasons: dynamic programming techniques are reliable but often slow, whereas Euler equation‐based methods are faster but have problematic or unknown convergence properties. This study attempts to bridge this gap. I show that a common iterative procedure on the first‐order conditions – 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 a large set of endogenous and exogenous state variables as well as a very broad spectrum of occasionally binding constraints.
Description
Keywords
38 Economics, 3802 Econometrics, 10 Reduced Inequalities
Journal Title
The Economic Journal
Conference Name
Journal ISSN
0013-0133
1468-0297
1468-0297
Volume Title
125
Publisher
Wiley
Publisher DOI
Rights
All rights reserved