Solving the stochastic growth model with a finite element method

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Abstract

Since it is the dominant paradigm of the business cycle and growth literatures, the stochastic growth model has been used to test the performance of alternative numerical methods. In this paper I apply the finite element method to this model. I show that the method is easy to apply and that, for examples such as the stochastic growth model, it gives accurate solutions within a second or two on a desktop computer. I also show how inequality constraints can be handled by redefining the optimization problem with penalty functions.

Original languageEnglish (US)
Pages (from-to)19-42
Number of pages24
JournalJournal of Economic Dynamics and Control
Volume20
Issue number1-3
DOIs
StatePublished - 1996

Bibliographical note

Funding Information:
This article is based in part on conversations with Jeff Eischen at North Carolina State University. I thank Graham Candler, Tom Sargent, Martie Starr, and three anonymous referees for helpful comments and the National Science Foundation for its support under grant SES-9108758. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis and the Federal Reserve System.

Keywords

  • Finite element method
  • Growth model

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