TY - JOUR
T1 - A General Endogenous Grid Method for Multi-Dimensional Models with Non-Convexities and Constraints
AU - Druedahl, Jeppe
AU - Jørgensen, Thomas Høgholm
N1 - JEL classification: C13; C63; D91
PY - 2017/1/1
Y1 - 2017/1/1
N2 - The endogenous grid method (EGM) significantly speeds up the solution of stochastic dynamic programming problems by simplifying or completely eliminating root-finding. 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.
AB - The endogenous grid method (EGM) significantly speeds up the solution of stochastic dynamic programming problems by simplifying or completely eliminating root-finding. 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.
U2 - 10.1016/j.jedc.2016.11.005
DO - 10.1016/j.jedc.2016.11.005
M3 - Journal article
SN - 0165-1889
VL - 74
SP - 87
EP - 107
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
ER -