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Solving the Neoclassical Growth Model with Quasi-Geometric Discounting: A Grid-Based Euler-Equation Method

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  • Lilia Maliar

    ()

  • Serguei Maliar

    ()

Abstract

The standard neoclassical growth model with quasi-geometric discounting is shown elsewhere (Krusell, P. and Smith, A., CEPR Discussion Paper No. 2651, 2000) to have multiple solutions. As a result, value-iterative methods fail to converge. The set of equilibria is however reduced if we restrict our attention to the interior (satisfying the Euler equation) solution. We study the performance of a grid-based Euler-equation methods in the given context. We find that such a method converges to an interior solution in a wide range of parameter values, not only in the “test” model with the closed-form solution but also in more general settings, including those with uncertainty. Copyright Springer Science + Business Media, Inc. 2005

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Bibliographic Info

Article provided by Society for Computational Economics in its journal Computational Economics.

Volume (Year): 26 (2005)
Issue (Month): 2 (October)
Pages: 163-172

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Handle: RePEc:kap:compec:v:26:y:2005:i:2:p:163-172

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Web page: http://www.springerlink.com/link.asp?id=100248
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Keywords: neoclassical growth model; numerical methods; quasi-geometric (hyperbolic) discounting; time-inconsistency;

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References

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  1. Krusell, Per & Kuruscu, Burhanettin & Smith, Anthony Jr., 2002. "Equilibrium Welfare and Government Policy with Quasi-geometric Discounting," Journal of Economic Theory, Elsevier, vol. 105(1), pages 42-72, July.
  2. Lilia Maliar & Serguei Maliar, 2003. "Solving The Neoclassical Growth Model With Quasi-Geometric Discounting: Non-Linear Euler-Equation Models," Working Papers. Serie AD 2003-23, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  3. Per Krusell & Anthony A Smith, Jr., 2001. "Consumption Savings Decisions with Quasi-Geometric Discounting," Levine's Working Paper Archive 625018000000000251, David K. Levine.
  4. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-57, July.
  5. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  6. Maliar, Lilia & Maliar, Serguei, 2006. "The Neoclassical Growth Model with Heterogeneous Quasi-Geometric Consumers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 635-654, April.
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Cited by:
  1. Maliar, Lilia & Maliar, Serguei, 2006. "Indeterminacy in a log-linearized neoclassical growth model with quasi-geometric discounting," Economic Modelling, Elsevier, vol. 23(3), pages 492-505, May.
  2. Maliar, Lilia & Maliar, Serguei & Valli, Fernando, 2010. "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 42-49, January.
  3. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.

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