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Computing equilibria in dynamic models with occasionally binding constraints


Brumm, Johannes; Grill, Michael (2014). Computing equilibria in dynamic models with occasionally binding constraints. Journal of Economic Dynamics and Control, 38:142-160.

Abstract

We propose a method to compute equilibria in dynamic models with several continuous state variables and occasionally binding constraints. These constraints induce non-differentiabilities in policy functions. We develop an interpolation technique that addresses this problem directly: It locates the non-differentiabilities and adds interpolation nodes there. To handle this flexible grid, it uses Delaunay interpolation, a simplicial interpolation technique. Hence, we call this method Adaptive Simplicial Interpolation (ASI). We embed ASI into a time iteration algorithm to compute recursive equilibria in an infinite horizon endowment economy where heterogeneous agents trade in a bond and a stock subject to various trading constraints. We show that this method computes equilibria accurately and outperforms other grid schemes by far.

Abstract

We propose a method to compute equilibria in dynamic models with several continuous state variables and occasionally binding constraints. These constraints induce non-differentiabilities in policy functions. We develop an interpolation technique that addresses this problem directly: It locates the non-differentiabilities and adds interpolation nodes there. To handle this flexible grid, it uses Delaunay interpolation, a simplicial interpolation technique. Hence, we call this method Adaptive Simplicial Interpolation (ASI). We embed ASI into a time iteration algorithm to compute recursive equilibria in an infinite horizon endowment economy where heterogeneous agents trade in a bond and a stock subject to various trading constraints. We show that this method computes equilibria accurately and outperforms other grid schemes by far.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Economics and Econometrics
Physical Sciences > Control and Optimization
Physical Sciences > Applied Mathematics
Language:English
Date:2014
Deposited On:31 Dec 2014 12:04
Last Modified:26 Jan 2022 04:27
Publisher:Elsevier
ISSN:0165-1889
OA Status:Green
Publisher DOI:https://doi.org/10.1016/j.jedc.2013.09.007
Other Identification Number:merlin-id:5127

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