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An algorithm for the solution of stochastic optimal control problems for large nonlinear econometric models
Author(s) -
Hall S. G.,
Stephenson M. J.
Publication year - 1990
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950050407
Subject(s) - nonlinear system , mathematical optimization , computer science , optimal control , stochastic control , econometric model , control (management) , mathematics , artificial intelligence , machine learning , physics , quantum mechanics
This paper considers the problem of solving an optimal control problem for large dynamic economic models which are both nonlinear and stochastic. It proposes a technique which combines conventional deterministic optimal control algorithms with the procedure of stochastic simulation, which calculates a numerical approximation to the distribution of the models endogenous variables. The new technique is computationally feasible for even large nonlinear models and, as an illustration of this, the Bank of England's large quarterly forecasting model is used in an example.