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Accuracy of policy function approximations for strongly concave recursive problems

Author

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  • Wilfredo L. Maldonado
  • Osvaldo Candido
  • Luis Felipe V. N. Pereira

Abstract

Under the hypotheses of strong concavity of the aggregator function and concavity of the stochastic operator which define the objective function of the stochastic dynamic programming problem (SDPP), we prove that the policy function approximation of the problem is a Hölder continuous function with respect to the value function approximation. From this, explicit error bounds for computation of the solution of such problems are provided. To illustrate the results we apply the error control formula to the solution of two SDPPs with aggregator functions: the neoclassical Ramsey economic growth model and the Lucas asset pricing model.

Suggested Citation

  • Wilfredo L. Maldonado & Osvaldo Candido & Luis Felipe V. N. Pereira, 2019. "Accuracy of policy function approximations for strongly concave recursive problems," International Journal of Economic Theory, The International Society for Economic Theory, vol. 15(3), pages 249-267, September.
    • Handle: RePEc:bla:ijethy:v:15:y:2019:i:3:p:249-267
    DOI: 10.1111/ijet.12171
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