Inequality Constraints and Euler Equation based Solution Methods

Pontus Rendahl ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Solving dynamic models with inequality constraints poses a challenging problem for two major reasons: dynamic programming techniques are reliable but often slow, while Euler equation based methods are fast but have problematic or unknown convergence properties. This paper attempts to bridge this gap. I show that a common iterative procedure on the Euler equation { usually referred to as time iteration { delivers a sequence of approximate policy functions that converges to the true solution under a wide range of circumstances. These circumstances extend to an arbitrarily large, but nite, set of endogenous and exogenous state-variables as well as a very broad spectrum of occasionally binding constraints.

Keywords: Inequality constraints; Envelope theorem; Time iteration (search for similar items in EconPapers)
JEL-codes: C61 C63 C68 (search for similar items in EconPapers)
Date: 2013-06-02
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Inequality Constraints and Euler Equation‐based Solution Methods (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1320

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