Maliar, L. and S. Maliar
Journal of Business & Economic Statistics – Vol. 21, No. 1

Keywords: Nonlinear models,Numerical solutions methods,Optimal growth,Parameterized expectations algorithm

Abstract: The Parameterized Expectations Algorithm (PEA) is a powerful tool for solving nonlinear stochastic dynamic models. However, it has an important shortcoming:it is not a contraction mapping technique and thus does not guarantee a solution will be found. We suggest a simple modification that enhances the convergence property of the algorithm. The idea is to rule out the possibility of (ex)implosive behavior by artificially restricting the simulated series within certain bounds. As the solution is refined along the iterations, the bounds are gradually removed. The modified PEA can systematically converge to the stationary solution starting from the nonstochastic steady state.