Econometrica: Mar, 1998, Volume 66, Issue 2

Analysis of a Numerical Dynamic Programming Algorithm Applied to Economic Models

https://doi.org/0012-9682(199803)66:2<409:AOANDP>2.0.CO;2-C
p. 409-426

Jesus Vigo-Aguiar, Manuel S. Santos

In this paper we develop a discretized version of the dynamic programming algorithm and study its convergence and stability properties. We show that the computed value function converges quadratically to the true value function and that the computed policy function converges linearly, as the mesh size of the discretization converges to zero; further, the algorithm is stable. We also discuss several aspects of the implementation of our procedures as applied to some commonly studied growth models.