An envelope method for solving continuous-time stochastic models with occasionally binding constraints

Neil White ()

Economics Letters, 2022, vol. 214, issue C

Abstract: I introduce a finite-difference solution method based on the envelope condition in continuous-time stochastic dynamic programming problems. The envelope method is easier to code and, in the presence of occasionally binding constraints, faster and more stable than popular methods based on the Hamilton–Jacobi–Bellman equation. As an illustration, I solve a stochastic growth model with irreversible investment.

Keywords: Numerical methods; Dynamic programming; Envelope condition; Occasionally binding constraints (search for similar items in EconPapers)
JEL-codes: C6 C61 C63 C68 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:214:y:2022:i:c:s0165176522000908

DOI: 10.1016/j.econlet.2022.110434

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