SOLVING THE NEOCLASSICAL GROWTH MODEL WITH QUASI-GEOMETRIC DISCOUNTING: NON-LINEAR EULER-EQUATION MODELS

The neoclassical growth model with quasi-geometric discounting is shown by Krusell and Smith (2000) to have multiple solutions. As a result, value-iterative methods fail to converge. The set of equilibria is however reduced if we restrict our attention to the interior (satisfying the Euler equation) solution. We study the performance of the grid-based and the simulation-based Euler-equation methods in the given context. We find that both methods converge to an interior solution in a wide range of parameter values, not only in the ''test'' model with the closed-form solution but also in more general settings, including those with uncertainty.