A General Endogenous Grid Method for Multi-Dimensional Models with Non-Convexities and Constraints

60 Pages Posted: 6 Sep 2016

See all articles by Jeppe Druedahl

Jeppe Druedahl

University of Copenhagen - Department of Economics

Thomas Jørgensen

University of Copenhagen

Date Written: September 5, 2016

Abstract

The endogenous grid method (EGM) significantly speeds up the solution of stochastic dynamic programming problems by simplifying or completely eliminating rootfinding. We propose a general and parsimonious EGM extended to handle 1) multiple continuous states and choices, 2) multiple occasionally binding constraints, and 3) non-convexities such as discrete choices. Our method enjoys the speed gains of the original one-dimensional EGM, while avoiding expensive interpolation on multi-dimensional irregular endogenous grids. We explicitly define a broad class of models for which our solution method is applicable, and illustrate its speed and accuracy using a consumption-saving model with both liquid assets and illiquid pension assets and a discrete retirement choice.

Keywords: Endogenous grid method, post-decision states, stochastic dynamic programming, continuous and discrete choices, occasionally binding constraints

JEL Classification: C13, C63, D91

Suggested Citation

Druedahl, Jeppe and Jørgensen, Thomas, A General Endogenous Grid Method for Multi-Dimensional Models with Non-Convexities and Constraints (September 5, 2016). Available at SSRN: https://ssrn.com/abstract=2834904 or http://dx.doi.org/10.2139/ssrn.2834904

Jeppe Druedahl (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Thomas Jørgensen

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

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