14.128 Dynamic Optimization and Economic Applications (Recursive Methods)
14.128 Dynamic Optimization and Economic Applications (Recursive Methods)
14.128 Dynamic Optimization and Economic Applications (Recursive Methods)
The unifying theme of this course is best captured by the title of our main reference book:
‘Recursive Methods in Economic Dynamics’. We start by covering deterministic and
stochastic dynamic optimization using dynamic programming analysis. We then study the
properties of the resulting dynamic systems. Finally, we will go over a recursive method
for repeated games that has proven useful in contract theory and macroeconomics. We
shall stress applications and examples of all these techniques throughout the course.
Stokey, Nancy L. and Robert E. Jr. Lucas with Edward C. Prescott, 1989, Recursive
Methods in Economic Dynamics, Cambridge, MA: Harvard University Press.
We will follow SLP’s exposition as closely as possible, departing only to add more recent
developments and applications when needed.
Although some homework assignments will seek to introduce you to solving problems
numerically, numerical methods are not a main part of this course. I highly recommend
Kenneth Judd’s ‘Numerical Methods in Economics’ book as a complement of the
material of this course.
The course grade will be based on problem set homework (30%) and a final exam (70%).
TA sessions are once a week and will be used mainly to go over problems and some
additional material not covered in the lectures.
References
Euler Equations and Transversality: Sufficiency and Necessity
J
Weitzman, M. L. (1973) “Duality Theory for Infinite Horizon Convex Models”,
Management Science 19, 783-789.
*Benveniste and Scheinkman “Duality Theory for Dynamic Optimization Models of
Economics: The Continuous Time Case” Journal of Economic Theory, v. 27, 1-19.
*Kamihigashi, Takashi “Necessity of Transversality Conditions for Infinite Horizon
Problems” Econometrica v69, n4 (July 2001): 995-1012
MIT
Kamihigashi, Takashi “A Simple Proof of the Necessity of the Transversality
Condition” Economic Theory v20, n2 (September 2002): 427-33
*Araujo, A. and J. A. Scheinkman, “Maximum Principle and Transversality Condition
for Concave Infinite Horizon Economic Models” Journal of Economic Theory v30,
n1 (June 1983): 1-16
J
Michel, Philippe “On the Transversality Condition in Infinite Horizon Optimal
Problems” Econometrica v50, n4 (July 1982): 975-85
J
Michel, Philippe “Some Clarifications on the Transversality Condition” Econometrica
v58, n3 (May 1990): 705-23
*Leung, Siu Fai “Transversality Condition and Optimality in a Class of Infinite Horizon
Continuous Time Economic Models”, Journal of Economic Theory, v54, n1 (June
1991): 224-33