Solving the Neoclassical Growth Model with Quasi-Geometric Discounting: A Grid-Based Euler-Equation Method

Lilia Maliar and Serguei Maliar

Computational Economics, 2005, vol. 26, issue 2, 163-172

Abstract: The standard neoclassical growth model with quasi-geometric discounting is shown elsewhere (Krusell, P. and Smith, A., CEPR Discussion Paper No. 2651, 2000) to have multiple solutions. As a result, value-iterative methods fail to converge. The set of equilibria is however reduced if we restrict our attention to the interior (satisfying the Euler equation) solution. We study the performance of a grid-based Euler-equation methods in the given context. We find that such a method converges to an interior solution in a wide range of parameter values, not only in the “test” model with the closed-form solution but also in more general settings, including those with uncertainty. Copyright Springer Science + Business Media, Inc. 2005

Keywords: neoclassical growth model; numerical methods; quasi-geometric (hyperbolic) discounting; time-inconsistency (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1007/s10614-005-1732-y

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