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On the Recursive Saddle Point Method

  • Nicola Pavoni
  • Ramon Marimon


    (Economics Bocconi University)

  • Matthias Messner

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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Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 294.

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Date of creation: 2005
Date of revision:
Handle: RePEc:red:sed005:294
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. repec:tpr:qjecon:v:121:y:2006:i:1:p:229-265 is not listed on IDEAS
  2. Aubhik Khan & Robert King & Alexander L. Wolman, 2002. "Optimal monetary policy," Working Papers 02-19, Federal Reserve Bank of Philadelphia.
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  9. Ezra Friedman, 1998. "Risk Sharing and the Dynamics of Inequality," Discussion Papers 1235, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  17. Chang, Roberto, 1998. "Credible Monetary Policy in an Infinite Horizon Model: Recursive Approaches," Journal of Economic Theory, Elsevier, vol. 81(2), pages 431-461, August.
  18. Attanasio, Orazio & Rios-Rull, Jose-Victor, 2000. "Consumption smoothing in island economies: Can public insurance reduce welfare?," European Economic Review, Elsevier, vol. 44(7), pages 1225-1258, June.
  19. Hanno Lustig & Stijn Van Nieuwerburgh, 2002. "Housing Collateral, Consumption Insurance and Risk Premia," Macroeconomics 0211008, EconWPA.
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