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Analytical and Numerical Solution of Finite-horizon Nonlinear Rational Expectations Models

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Abstract

This paper considers the solution of nonlinear rational expectations models resulting from the optimality conditions of a finite-horizon intertemporal optimisation problem satisfying Bellman's principle of optimality (and possibly involving inequality constraints). A backward recursive procedure is used to characterise and solve the time- varying optimal decision rules generally associated with these models. At each stage of these backward recursions, either an analytical or numerical solution of the optimality conditions is required. When an analytical solution is not possible, a minimum weighted residual approach is used. The solution technique is illustrated using a life-cycle model of consumption under labour income and interest rate uncertainties (and possibly involving liquidity constraints). Approximate numerical solutions are provided and compared with certainty-equivalent solutions and, when possible, with exact solutions.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 9808.

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Date of creation: 1998
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Handle: RePEc:cam:camdae:9808

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Web page: http://www.econ.cam.ac.uk/index.htm

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Cited by:
  1. Hung, V.T.Y., 1993. "Sources of external balance fluctuations," Discussion Paper Series In Economics And Econometrics 9307, Economics Division, School of Social Sciences, University of Southampton.
  2. Alistair Ulph & David Maddison, 1997. "Uncertainty, learning and international environmental policy coordination," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 9(4), pages 451-466, June.
  3. Khalil, F & Rochet, J-C, 1997. "Contracts and Productive Information Gathering," Discussion Papers in Economics at the University of Washington 97-16, Department of Economics at the University of Washington.
  4. Blackburn, K. & Hung, V.T.Y., 1992. "Endogenous growth and trade liberalization," Discussion Paper Series In Economics And Econometrics 9207, Economics Division, School of Social Sciences, University of Southampton.
  5. Ulph, A. & Ulph, D., 1994. "Who gains from learning about global warming," Discussion Paper Series In Economics And Econometrics 9407, Economics Division, School of Social Sciences, University of Southampton.
  6. Mason, R. & Wright, S., 1999. "The effects of uncertainty on optimal consumption," Discussion Paper Series In Economics And Econometrics 9907, Economics Division, School of Social Sciences, University of Southampton.
  7. Lu, M. & Zhang, Z., 1998. "Parallel exchange market as a transition mechanism for foreign exchange reform: China's experiment," Discussion Paper Series In Economics And Econometrics 9807, Economics Division, School of Social Sciences, University of Southampton.
  8. Srinivasan, S., 1996. "Estimation of own R&D, R&D spillovers and exogenous technical change effects in some U.S. high-technology industries," Discussion Paper Series In Economics And Econometrics 9607, Economics Division, School of Social Sciences, University of Southampton.

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