Autore
RENDAHL, Pontus

Titolo
Inequality Constraints in Recursive Economies
Periodico
European University Institute of Badia Fiesolana (Fi). Department of Economics - Working papers
Anno: 2006 - Fascicolo: 6 - Pagina iniziale: 1 - Pagina finale: 21

Dynamic models with inequality constraints pose a challenging prob- lem for two major reasons: Dynamic Programming techniques often necessitate a non established differentiability of the value function, while Euler equation based techniques have problematic or unknown convergence properties. This paper aims to resolve these two concerns: An \envelope theorem" is presented that establishes the differentiability of any element in the convergent sequence of approximate value functions when inequality constraints may bind. As a corollary, convergence of an iterative procedure on the Euler equation, usually referred to as time iteration, is ascertained. This procedure turns out to be very convenient from a computational perspective; dynamic economic problems with inequality constraints can be solved reliably and extremely e±ciently by exploiting the theoretical insights provided by the paper.




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