Jeppe Druedahl – University of Copenhagen

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Jeppe Druedahl

"A Fast Nested Endogenous Grid Method For Solving General Consumption-Saving Models"

By Jeppe Druedahl, University of Copenhagen

Abstract

This paper proposes a new fast method to solve multi-dimensional consumption-saving models. A model with non-durable and durable consumption subject to adjustment costs can e.g. be solved in a few seconds. The solution method is based on nesting an endogenous grid method (EGM) step inside a standard value function iteration (VFI) algorithm. This is shown to both simplify the optimization problem in the VFI step, and reduce the overall need for time consuming numerical integration. A novel vectorized multi-linear interpolation algorithm is furthermore introduced to speed up the EGM step. The solution method is applicable to a much broader class of models than existing pure EGMs. For a benchmark two-asset consumption-saving model with liquid and illiquid assets, the proposed solution method is more than a 100 times faster than pure value function iteration for a given level of accuracy. Software is provided.

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