Value Function and Optimal Decision Rules of a Linear-quadratic Approximation
This code supports the text in Javier Diaz-Gimenez, Linear Quadratic Approximations: An Introduction, Ramon Marimon and Andrew Scott (eds), Computational Methods for the Study of Dynamic Economies, Chapter 2, Oxford University Press. The functional form of many dynamic optimization problems is so complicated that it is impossible to find a closed-form solution. After having calculated the steady state or stable growth path of the economy, one can expand the utility function around that state with an LQ-approximation to study the dynamic behaviour of the model under small shocks.
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