A Guide on Solving Non-convex Consumption-Saving Models

Jeppe Druedahl ()
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Jeppe Druedahl: University of Copenhagen

Computational Economics, 2021, vol. 58, issue 3, No 8, 747-775

Abstract: Abstract Consumption-saving models with adjustment costs or discrete choices are typically hard to solve numerically due to the presence of non-convexities. This paper provides a number of tools to speed up the solution of such models. Firstly, I use that many consumption models have a nesting structure implying that the continuation value can be efficiently pre-computed and the consumption choice solved separately before the remaining choices. Secondly, I use that an endogenous grid method extended with an upper envelope step can be used to solve efficiently for the consumption choice. Thirdly, I use that the required pre-computations can be optimized by a novel loop reordering when interpolating the next-period value function. As an illustrative example, I solve a model with non-durable consumption and durable consumption subject to adjustment costs. Combining the provided tools, the model is solved almost 50 times faster than with standard value function iteration for a given level of accuracy. Software is provided in both Python and C++.

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: C6 D91 E21 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10614-020-10045-x

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