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A General Endogenous Grid Method for Multi-Dimensional Models with Non-Convexities and Constraints

Jeppe Druedahl and Thomas Jørgensen ()
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Jeppe Druedahl: Department of Economics, University of Copenhagen

No 16-09, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: The endogenous grid method (EGM) significantly speeds up the solution of stochastic dynamic programming problems by simplifying or completely eliminating rootfinding. 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)
Pages: 61 pages
Date: 2016-09-05
New Economics Papers: this item is included in nep-cmp, nep-dge and nep-ore
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Journal Article: A general endogenous grid method for multi-dimensional models with non-convexities and constraints (2017) Downloads
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