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A general endogenous grid method for multi-dimensional models with non-convexities and constraints

Jeppe Druedahl and Thomas Jørgensen ()

Journal of Economic Dynamics and Control, 2017, vol. 74, issue C, 87-107

Abstract: The endogenous grid method (EGM) significantly speeds up the solution of stochastic dynamic programming problems by simplifying or completely eliminating root-finding. We propose a general and parsimonious EGM extended to handle (1) multiple continuous states and choices, (2) multiple occasionally binding constraints, and (3) non-convexities such as discrete choices. Our method enjoys the speed gains of the original one-dimensional EGM, while avoiding expensive interpolation on multi-dimensional irregular endogenous grids. We explicitly define a broad class of models for which our solution method is applicable, and illustrate its speed and accuracy using a consumption–saving model with both liquid assets and illiquid pension assets and a discrete retirement choice.

Keywords: Endogenous grid method; Post-decision states; Stochastic dynamic programming; Continuous and discrete choices; Occasionally binding constraints (search for similar items in EconPapers)
JEL-codes: C13 C63 D91 (search for similar items in EconPapers)
Date: 2017
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Working Paper: A General Endogenous Grid Method for Multi-Dimensional Models with Non-Convexities and Constraints (2016) Downloads
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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