Approximating High-Dimensional Dynamic Models: Sieve Value Function Iteration

42 Pages Posted: 18 Apr 2012 Last revised: 8 Nov 2012

See all articles by Peter Arcidiacono

Peter Arcidiacono

Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Patrick J. Bayer

Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Federico A Bugni

Duke University, Dept. of Economics

Jonathan James

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Multiple version iconThere are 3 versions of this paper

Date Written: April 17, 2012

Abstract

Many dynamic problems in economics are characterized by large state spaces which make both computing and estimating the model infeasible. We introduce a method for approximating the value function of high-dimensional dynamic models based on sieves and establish results for the: (a) consistency, (b) rates of convergence, and (c) bounds on the error of approximation. We embed this method for approximating the solution to the dynamic problem within an estimation routine and prove that it provides consistent estimates of the model’s parameters. We provide Monte Carlo evidence that our method can successfully be used to approximate models that would otherwise be infeasible to compute, suggesting that these techniques may substantially broaden the class of models that can be solved and estimated.

Keywords: Large state space, Dynamic decision problem, Sieve approximation, Value function, Value function iteration

JEL Classification: C02, C44, C60, C63

Suggested Citation

Arcidiacono, Peter and Bayer, Patrick J. and Bugni, Federico Andres and James, Jonathan, Approximating High-Dimensional Dynamic Models: Sieve Value Function Iteration (April 17, 2012). FRB of Cleveland Working Paper No. 12-10R, Available at SSRN: https://ssrn.com/abstract=2041518

Peter Arcidiacono

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Patrick J. Bayer

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Federico Andres Bugni

Duke University, Dept. of Economics ( email )

Duke University Dept. of Economics
213 Social Sciences Box 90097
Durham, NC 27708-0204
United States
919-660-1887 (Phone)

HOME PAGE: http://econ.duke.edu/~fb32/index.html

Jonathan James (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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