Inequality Constraints in Recursive Economies

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Inequality Constraints in Recursive Economies

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Rendahl Pontus (European University Institute)

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Pontus Rendahl

Abstract

Dynamic models with inequality constraints pose a challenging prob- lem for two major reasons: Dynamic Programming techniques often necessitate a non established differentiability of the value function, while Euler equation based techniques have problematic or unknown convergence properties. This paper aims to resolve these two concerns: An envelope theorem is presented that establishes the differentiability of any element in the convergent sequence of approximate value functions when inequality constraints may bind. As a corollary, convergence of an iterative procedure on the Euler equation, usually referred to as time iteration, is ascertained. This procedure turns out to be very convenient from a computational perspective; dynamic economic problems with inequality constraints can be solved reliably and extremely effciently by exploiting the theoretical insights provided by the paper

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 174.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:174

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Paper
- Pontus Rendahl, 2006. "Inequality Constraints in Recursive Economies," Economics Working Papers ECO2006/6, European University Institute. [Downloadable!]

Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-07-15 (All new papers)
NEP-DGE-2006-07-15 (Dynamic General Equilibrium)

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