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On the Recursive Saddle Point Method

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  • Matthias Messner
  • Nicola Pavoni

Abstract

In this paper a simple dynamic optimization problem is solved with the help of the recursive saddle point method developed by Marcet and Marimon (1999). According to Marcet and Marimon, their technique should yield a full characterization of the set of solutions for this problem. We show though, that while their method allows us to calculate the true value of the optimization program, not all solutions which it admits are correct. Indeed, some of the policies which it generates as solutions to our problem, are either suboptimal or do not even satisfy feasibility. We identify the reasons underlying this failure and discuss its implications for the numerous existing applications.

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Bibliographic Info

Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000000050.

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Date of creation: 17 Feb 2004
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Handle: RePEc:cla:levrem:122247000000000050

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  16. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  17. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 285-315, 04.
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