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The Endogenous Grid Method without Analytical Inverse Marginal Utility

Author

Listed:
  • Adam Hallengreen

    (Department of Economics, University of Copenhagen)

  • Thomas H. Joergensen

    (Department of Economics, University of Copenhagen)

  • Annasofie M. Olesen

    (Department of Economics, University of Copenhagen)

Abstract

The computational time required to solve and estimate dynamic economic models is one of the main constraints in empirical research. The Endogenous Grid Method (EGM) proposed by Carroll (2006) is known to offer impressive speed gains over more traditional stochastic dynamic programming methods, such as Value Function Iterations (VFI). However, existing EGM implementations implicitly require an analytical expression for the inverse marginal utility, which is not known in many interesting cases. We propose a simple and fast approach, which we refer to as the interpolated EGM (iEGM), that can be applied even when the inverse marginal utility is not known analytically. We show through two applications that the iEGM inherits the speed andaccuracy of the EGM and that our approach is an order of magnitude faster than traditionalapproaches.

Suggested Citation

  • Adam Hallengreen & Thomas H. Joergensen & Annasofie M. Olesen, 2024. "The Endogenous Grid Method without Analytical Inverse Marginal Utility," CEBI working paper series 24-11, University of Copenhagen. Department of Economics. The Center for Economic Behavior and Inequality (CEBI).
    • Handle: RePEc:kud:kucebi:2411
    as

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    File URL: https://www.econ.ku.dk/cebi/publikationer/working-papers/CEBI_WP_11-24.pdf
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    References listed on IDEAS

    as
    1. Barillas, Francisco & Fernandez-Villaverde, Jesus, 2007. "A generalization of the endogenous grid method," Journal of Economic Dynamics and Control, Elsevier, vol. 31(8), pages 2698-2712, August.
    2. Fang Yang, 2009. "Consumption over the Life Cycle: How Different is Housing?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 423-443, July.
    3. Giulio Fella, 2014. "A generalized endogenous grid method for non-smooth and non-concave problems," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 329-344, April.
    4. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
    5. Fedor Iskhakov & Thomas H. Jørgensen & John Rust & Bertel Schjerning, 2017. "The endogenous grid method for discrete‐continuous dynamic choice models with (or without) taste shocks," Quantitative Economics, Econometric Society, vol. 8(2), pages 317-365, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Endogenous grid method; dynamic programming; numerical methods; limited commitment;
    All these keywords.

    JEL classification:

    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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