Inequality Constraints in Recursive Economies

Pontus Rendahl ()

No ECO2006/6, Economics Working Papers from European University Institute

Abstract: Dynamic models with inequality constraints pose a challenging problem for two major reasons: Dynamic Programming techniques often necessitate a non established differentiability of the value function, while Euler equation based techniques have problematic or unknown convergence properties. This paper aims to resolve these two concerns: An "envelope theorem" is presented that establishes the differentiability of any element in the convergent sequence of approximate value functions when inequality constraints may bind. As a corollary, convergence of an iterative procedure on the Euler equation, usually referred to as time iteration, is ascertained. This procedure turns out to be very convenient from a computational perspective; dynamic economic problems with inequality constraints can be solved reliably and extremely efficiently by exploiting the theoretical insights provided by the paper.

Keywords: Inequality constraints; Envelope theorem; Recursive methods; Time iteration (search for similar items in EconPapers)
JEL-codes: C61 C63 C68 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-cba, nep-cmp and nep-dge
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://cadmus.iue.it/dspace/bitstream/1814/4203/1/ECO2006-6.pdf main text
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Working Paper: Inequality Constraints in Recursive Economies (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eui:euiwps:eco2006/6

Access Statistics for this paper

More papers in Economics Working Papers from European University Institute Badia Fiesolana, Via dei Roccettini, 9, 50014 San Domenico di Fiesole (FI) Italy. Contact information at EDIRC.
Bibliographic data for series maintained by Cécile Brière ().