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Solving dynamic stochastic models with multiple occasionally binding constraints

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  • Guerra Vallejos, Ernesto
  • Bobenrieth Hochfarber, Eugenio
  • Bobenrieth Hochfarber, Juan
  • Wright, Brian D.

Abstract

Non-negativity and capacity constraints on accumulation, and price floors, have particular relevance for water, oil, gas, electricity, and other energy commodities. Such constraints are empirically relevant; even if historical records do not include periods where the capacity constraint is binding or where marginal value is zero, a positive probability that such events might occur affects rational accumulation and consumption decisions. In this paper we provide sufficient conditions for non-convergence and sufficient conditions for convergence of a solution algorithm widely used to solve and characterize dynamic models, which is fast if it converges. Our results are useful for policy evaluation based on structural econometric estimation involving large numbers of solutions.

Suggested Citation

  • Guerra Vallejos, Ernesto & Bobenrieth Hochfarber, Eugenio & Bobenrieth Hochfarber, Juan & Wright, Brian D., 2021. "Solving dynamic stochastic models with multiple occasionally binding constraints," Economic Modelling, Elsevier, vol. 105(C).
    • Handle: RePEc:eee:ecmode:v:105:y:2021:i:c:s026499932100225x
    DOI: 10.1016/j.econmod.2021.105636
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    More about this item

    Keywords

    Commodities; Storage capacity; Free disposal; Numerical solutions; DSGE;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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