Cooper, Russell W.; Adda, Jerome

Dynamic Economics - Quantitative Methods and Applications : Quantitative Methods and Applications

1 Overview 1(6) I Theory 2 Theory of Dynamic Programming 7(26) 2.1 Overview 7(1) 2.2 Indirect Utility 7(2) 2.2.1 Consumers 7(1) 2.2.2 Firms 8(1) 2.3 Dynamic Optimization: A Cake-Eating Example 9(7) 2.3.1 Direct Attack 10(2) 2.3.2 Dynamic Programming Approach 12(4) 2.4 Some Extensions of the Cake-Eating Problem 16(8) 2.4.1 Infinite Horizon 16(4) 2.4.2 Taste Shocks 20(2) 2.4.3 Discrete Choice 22(2) 2.5 General Formulation 24(7) 2.5.1 Nonstochastic Case 24(5) 2.5.2 Stochastic Dynamic Programming 29(2) 2.6 Conclusion 31(2) 3 Numerical Analysis 33(28) 3.1 Overview 33(1) 3.2 Stochastic Cake-Eating Problem 34(12) 3.2.1 Value Function Iterations 34(6) 3.2.2 Policy Function Iterations 40(1) 3.2.3 Projection Methods 41(5) 3.3 Stochastic Discrete Cake-Eating Problem 46(4) 3.3.1 Value Function Iterations 47(3) 3.4 Extensions and Conclusion 50(2) 3.4.1 Larger State Spaces 50(2) 3.5 Appendix: Additional Numerical Tools 52(9) 3.5.1 Interpolation Methods 52(3) 3.5.2 Numerical Integration 55(4) 3.5.3 How to Simulate the Model 59(2) 4 Econometrics 61(42) 4.1 Overview 61(1) 4.2 Some Illustrative Examples 61(18) 4.2.1 Coin Flipping 61(13) 4.2.2 Supply and Demand Revisited 74(5) 4.3 Estimation Methods and Asymptotic Properties 79(18) 4.3.1 Generalized Method of Moments 80(3) 4.3.2 Maximum Likelihood 83(2) 4.3.3 Simulation-Based Methods 85(12) 4.4 Conclusion 97(6) II Applications 5 Stochastic Growth 103(36) 5.1 Overview 103(1) 5.2 Nonstochastic Growth Model 103(8) 5.2.1 An Example 105(2) 5.2.2 Numerical Analysis 107(4) 5.3 Stochastic Growth Model 111(11) 5.3.1 Environment 112(1) 5.3.2 Bellman's Equation 113(2) 5.3.3 Solution Methods 115(5) 5.3.4 Decentralization 120(2) 5.4 A Stochastic Growth Model with Endogenous Labor Supply 122(3) 5.4.1 Planner's Dynamic Programming Problem 122(2) 5.4.2 Numerical Analysis 124(1) 5.5 Confronting the Data 125(7) 5.5.1 Moments 126(2) 5.5.2 GMM 128(2) 5.5.3 Indirect Inference 130(1) 5.5.4 Maximum Likelihood Estimation 131(1) 5.6 Some Extensions 132(6) 5.6.1 Technological Complementarities 133(1) 5.6.2 Multiple Sectors 134(2) 5.6.3 Taste Shocks 136(1) 5.6.4 Taxes 136(2) 5.7 Conclusion 138(1) 6 Consumption 139(26) 6.1 Overview and Motivation 139(1) 6.2 Two-Period Problem 139(8) 6.2.1 Basic Problem 140(3) 6.2.2 Stochastic Income 143(2) 6.2.3 Portfolio Choice 145(1) 6.2.4 Borrowing Restrictions 146(1) 6.3 Infinite Horizon Formulation: Theory and Empirical Evidence 147(17) 6.3.1 Bellman's Equation for the Infinite Horizon Problem 147(1) 6.3.2 Stochastic Income 148(2) 6.3.3 Stochastic Returns: Portfolio Choice 150(3) 6.3.4 Endogenous Labor Supply 153(3) 6.3.5 Borrowing Constraints 156(4) 6.3.6 Consumption over the Life Cycle 160(4) 6.4 Conclusion 164(1) 7 Durable Consumption 165(22) 7.1 Motivation 165(1) 7.2 Permanent Income Hypothesis Model of Durable Expenditures 166(5) 7.2.1 Theory 166(2) 7.2.2 Estimation of a Quadratic Utility Specification 168(1) 7.2.3 Quadratic Adjustment Costs 169(2) 7.3 Nonconvex Adjustment Costs 171(16) 7.3.1 General Setting 172(1) 7.3.2 Irreversibility and Durable Purchases 173(2) 7.3.3 A Dynamic Discrete Choice Model 175(12) 8 Investment 187(28) 8.1 Overview and Motivation 187(1) 8.2 General Problem 188(1) 8.3 No Adjustment Costs 189(2) 8.4 Convex Adjustment Costs 191(11) 8.4.1 Q Theory: Models 192(1) 8.4.2 Q Theory: Evidence 193(5) 8.4.3 Euler Equation Estimation 198(3) 8.4.4 Borrowing Restrictions 201(1) 8.5 Nonconvex Adjustment: Theory 202(7) 8.5.1 Nonconvex Adjustment Costs 203(5) 8.5.2 Irreversibility 208(1) 8.6 Estimation of a Rich Model of Adjustment Costs 209(4) 8.6.1 General Model 209(3) 8.6.2 Maximum Likelihood Estimation 212(1) 8.7 Conclusion 213(2) 9 Dynamics of Employment Adjustment 215(26) 9.1 Motivation 215(1) 9.2 General Model of Dynamic Labor Demand 216(1) 9.3 Quadratic Adjustment Costs 217(7) 9.4 Richer Models of Adjustment 224(5) 9.4.1 Piecewise Linear Adjustment Costs 224(2) 9.4.2 Nonconvex Adjustment Costs 226(2) 9.4.3 Asymmetries 228(1) 9.5 The Gap Approach 229(6) 9.5.1 Partial Adjustment Model 230(1) 9.5.2 Measuring the Target and the Gap 231(4) 9.6 Estimation of a Rich Model of Adjustment Costs 235(3) 9.7 Conclusion 238(3) 10 Future Developments 241(24) 10.1 Overview and Motivation 241(1) 10.2 Price Setting 241(7) 10.2.1 Optimization Problem 242(2) 10.2.2 Evidence on Magazine Prices 244(1) 10.2.3 Aggregate Implications 245(3) 10.3 Optimal Inventory Policy 248(6) 10.3.1 Inventories and the Production-Smoothing Model 248(4) 10.3.2 Prices and Inventory Adjustment 252(2) 10.4 Capital and Labor 254(1) 10.5 Technological Complementarities: Equilibrium Analysis 255(2) 10.6 Search Models 257(6) 10.6.1 A Simple Labor Search Model 257(2) 10.6.2 Estimation of the Labor Search Model 259(1) 10.6.3 Extensions 260(3) 10.7 Conclusion 263(2) Bibliography 265(10) Index 275