A Simple but Powerful Simulated Certainty Equivalent Approximation Method for Dynamic Stochastic Problems / Yongyang Cai, Kenneth L. Judd.

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Cai, Yongyang

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w28502.Publication details: Cambridge, Mass. National Bureau of Economic Research 2021.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We introduce a novel simulated certainty equivalent approximation (SCEQ) method for solving dynamic stochastic problems. Our examples show that this method only requires a desktop computer to solve high-dimensional finite- or infinite-horizon, stationary or nonstationary dynamic stochastic problems with hundreds of state variables, a wide state space, and occasionally binding constraints. The SCEQ method is simple, stable, and efficient, which makes it suitable for solving complex economic problems that cannot be solved by other algorithms.

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February 2021.

We introduce a novel simulated certainty equivalent approximation (SCEQ) method for solving dynamic stochastic problems. Our examples show that this method only requires a desktop computer to solve high-dimensional finite- or infinite-horizon, stationary or nonstationary dynamic stochastic problems with hundreds of state variables, a wide state space, and occasionally binding constraints. The SCEQ method is simple, stable, and efficient, which makes it suitable for solving complex economic problems that cannot be solved by other algorithms.