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Computing equilibria in dynamic models with occasionally binding constraints

Johannes Brumm and Michael Grill

Journal of Economic Dynamics and Control, 2014, vol. 38, issue C, 142-160

Abstract: We propose a method to compute equilibria in dynamic models with several continuous state variables and occasionally binding constraints. These constraints induce non-differentiabilities in policy functions. We develop an interpolation technique that addresses this problem directly: It locates the non-differentiabilities and adds interpolation nodes there. To handle this flexible grid, it uses Delaunay interpolation, a simplicial interpolation technique. Hence, we call this method Adaptive Simplicial Interpolation (ASI). We embed ASI into a time iteration algorithm to compute recursive equilibria in an infinite horizon endowment economy where heterogeneous agents trade in a bond and a stock subject to various trading constraints. We show that this method computes equilibria accurately and outperforms other grid schemes by far.

Keywords: Adaptive grid; Delaunay interpolation; Non-differentiabilities; Occasionally binding constraints; Simplicial interpolation (search for similar items in EconPapers)
JEL-codes: C63 C68 E21 G11 (search for similar items in EconPapers)
Date: 2014
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