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

  • Lilia Maliar

    ()

  • Serguei Maliar

    ()

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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File URL: http://hdl.handle.net/10.1007/s10614-005-1732-y
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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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  1. Per Krusell & Burhanettin Kuruscu & Anthony A. Smith Jr., 2001. "Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting," Temi di discussione (Economic working papers) 413, Bank of Italy, Economic Research and International Relations Area.
  2. 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.
  3. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  4. Per Krusell & Anthony A Smith, Jr., 2001. "Consumption Savings Decisions with Quasi-Geometric Discounting," Levine's Working Paper Archive 625018000000000251, David K. Levine.
  5. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-57, July.
  6. 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).
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