Using Nonlinear Model Predictive Control for Dynamic Decision Problems in Economics

This paper presents a new approach to solve dynamic decision models in economics. The proposed procedure, called Nonlinear Model Predictive Control (NMPC), relies on the iterative solution of optimal control problems on finite time horizons and is well established in engineering applications for stabilization and tracking problems. Only quite recently, extensions to more general optimal control problems including those appearing in economic applications have been investigated. Like Dynamic Programming (DP), NMPC does not rely on linearization techniques but uses the full nonlinear model and in this sense provides a global solution to the problem. However, unlike DP, NMPC only computes one optimal trajectory at a time, thus avoids to grid the state space and for this reason the computational demand grows much more moderate than for DP. In this paper we explain the basic idea of NMPC together with some implementational details and illustrate its ability to solve dynamic decision problems in economics by means of numerical simulations for various examples, including stochastic problems, models with multiple equilibria and regime switches in the dynamics