Inequality Constraints in Recursive Economies

Pontus Rendahl (pontus.rendahl@gmail.com)

No 174, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: Dynamic models with inequality constraints pose a challenging prob- lem for two major reasons: Dynamic Programming techniques often necessitate a non established differentiability of the value function, while Euler equation based techniques have problematic or unknown convergence properties. This paper aims to resolve these two concerns: An envelope theorem is presented that establishes the differentiability of any element in the convergent sequence of approximate value functions when inequality constraints may bind. As a corollary, convergence of an iterative procedure on the Euler equation, usually referred to as time iteration, is ascertained. This procedure turns out to be very convenient from a computational perspective; dynamic economic problems with inequality constraints can be solved reliably and extremely effciently by exploiting the theoretical insights provided by the paper

Keywords: Inequality constraints; Envelope theorem; Recursive methods; Time iteration (search for similar items in EconPapers)
JEL-codes: C61 C63 C68 (search for similar items in EconPapers)
Date: 2006-07-04
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (4)

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Working Paper: Inequality Constraints in Recursive Economies (2006)
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