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Sunday, February 17, 2013

Dynamic programming with credit constraints

I am looking for simple examples of economic models with occasionally binding credit constraints.  I would like to find the most straightforward example possible, and then bludgeon it into submission with my various numerical algorithms...suggestions are much appreciated!

4 comments:

  1. Do you need a microfounded credit constraint? The Evans and Jovanovic (1989, JPE) model has an ad-hoc credit constraint but it is quite a cool little model.

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    1. I would prefer that it be microfounded. I want the optimal policy function for the control(s) to be kinked because of an endogenously binding constraint...as opposed to being kinked because of some exogenously imposed feasibility constraint.

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  2. I'm not quite sure if it's what you're looking for, but the simplest example would be consumption-saving problem with constant interest rate (lower than the discount rate), stochastic income evolving as two-state Markov chain, and a borrowing constraint, see e.g. chapter on Bewley models in Ljungqvist and Sargent textbook.

    Another simple example is stochastic growth model with irreversible investment, which has been used as benchmark in Christiano & Fisher (2000): Algorithms for solving dynamic models with occasionally binding constraints, JEDC 24 (8). Also, Pontus Rendahl has a working paper "Inequality Constraints and Euler Equation based Solution Methods" with some theory and examples on dynamic programming with binding constraints.

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    1. I was planning on looking through Ljungqvist and Sargent later this evening. I just download Christiano and Fisher (2000). The code I posted a couple of days ago for the Ramsey model can be used to solve a deterministic version of the model they analyze. I have code for a stochastic version of the problem as well, but want to tweak the output a bit before I post it on GitHub. Thanks for the suggestions!

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