An envelope method for solving continuous-time stochastic models with occasionally binding constraints

White, Neil

An envelope method for solving continuous-time stochastic models with occasionally binding constraints

2022

White, Neil

I introduce a finite-difference solution method based on the envelope condition in continuous-time stochastic dynamic programming problems. The envelope method is easier to code and, in the presence of occasionally binding constraints, faster and more stable than popular methods based on the Hamilton–Jacobi–Bellman equation. As an illustration, I solve a stochastic growth model with irreversible investment.

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