9 views

Uploaded by Hélio Fonseca

- content area lesson plan 2
- Ch4 Logs Ib Practice
- Paper_1
- Scheduling
- Convegni BSC'03 Lezionebcg
- Assignment 2
- Lesson Plan
- FECT Hera (Piping Presentation)
- D1,L9 Linear Programming.ppt
- QANT520 Spring 2019 Syllabus
- Search for an Optimal Solution to Vague Traffic Problems Using the PSK Method
- Hurlstone 2012 2U Trial
- study of current transformer.pdf
- Affinnova Fact Sheet - Intro to IDDEA IIn
- A Novel Correlation for Prediction of Gas Viscosity
- Flow Through Triangular Notch 000
- The Project Life Cycle
- Suggested+Solutions+NPMaCVT05V1Eng+Part+I+Problems++1 10
- 15.IJMPERDAPR201915
- Lagrange

You are on page 1of 5

Martin Scheffel

For dynamic optimization in continuous time, many books or articles use the

Hamiltonian. This function was derived by Pontryagin (1962) using calculus of varia-

tion. You may find all that you need on this topic in an excellent small book by Alpha

Chiang. Moreover, the example of the neoclassical growth model is well exposed in the

book by Robert Barro and Xavier Sala-i-Martin. The full references are:

Barro/ Sala-i-Martin 2003: Economic Growth

Chiang 1999: Elements of Dynamic Optimization.

1 Task

Consider the following optimization problem in continuous time

Z T

max F (s(t), c(t), , t) dt (1)

c(t) 0

subject to

s(0) given

where the functions s(t) and c(t) denote the path of the state- and control variables.

For simplicity assume that

1

2 Pontryagin’s Maximum Principle

To begin with, we want to use the familiar Lagrangean to solve this problem. Let λ(t)

denote the Lagrange-multiplier associated with the constraint in period t. This gives

0 = λ(t) · [f (s(t), c(t), t) − ṡ(t)]

Z T

0= λ(t) · [f (s(t) , c(t), t) − ṡ(t)] dt

0

Z T Z T

L= F (s(t), c(t), t) dt −

λ(t) · [f (s(t), c(t), t) − ṡ(t)] dt

0 0

Z T Z T

L= [F (s(t), c(t), t) + λ(t) · f (s(t), c(t), t)] dt − λ(t)ṡ(t) dt (3)

0 0

Define the Hamiltonian as H(s(t), c(t), t) ≡ F (s(t), c(t), t) + λ(t) · f (s(t), c(t), t) such

that equation (3) gets

Z T Z T

L= H(s(t), c(t), t) dt − λ(t)ṡ(t) dt

0 0

Z T Z T

λ(t)ṡ(t) dt = [λ(t)s(t)]T0 −

λ̇(t)s(t) dt

0 0

Z T

= λ(T )s(T ) − λ(0)s(0) − λ̇(t)s(t) dt

0

Z T Z T

L= H(s(t), c(t), t) dt + λ̇(t)s(t) dt + λ(0)s(0) − λ(T )s(T )

0 0

Now, we are going to use some principles of the calculus of variation. Assume that

we already know the optimal consumption policy c∗ (t). Hence, we also know the

optimal path of the state variable s∗ (t), too. Let p(t) denote an arbitrary continuous

function. For any small ∈ R the plan c(t) = c∗ (t) + p(t) is a perturbation of the

optimal plan c∗ (t). Hence, there is also an associated perturbed path of the state

variable s(t) = s∗ (t) + q(t). We can now rewrite the Lagrangean as a function of the

2

perturbation parameter and arrive at:

Z T

L() = H(s∗ (t) + q(t), c∗ (t) + p(t), t) dt+

0

Z T

λ̇(t)[s∗ (t) + q(t)] dt + λ(0)s(0) − λ(T )[s∗ (T ) + q(t)]

0

We already know that the optimum is = 0. Nevertheless, the first order condition

with respect to gives a quite powerful insight into this dynamic optimization problem,

helping us to characterize the optimal plan c∗ (t).

Z T Z T

∂L ∂H ∂H

= q(t) + p(t) dt + λ̇(t)q(t) dt − λ(T )q(T )

∂ 0 ∂s(t) ∂c(t) 0

Z T Z T

∂H ∂H

0= q(t) + λ̇(t) dt + p(t) dt − λ(T )q(T ) (4)

0 ∂s(t) 0 ∂c(t)

Since the perturbation function p(t) and the induced perturbation function q(t) are

arbitrary, equation (4) must hold for every p(t) and associated q(t). Hence, the factors

∂H ∂H

in front of p(t) and q(t) have to be 0. That means ∂s(t) + λ̇(t) = 0, ∂c(t) = 0 and

consequently λ(T )q(T ) = 0.

From the last condition, we get the so called Transversality Condition (TVC), where

we have to distinguish three different cases:

1. Assume s(T ) is given. This implies s∗ (T ) = s(T ), such that q(T ) = 0. Since

λ(T )q(T ) = 0, there is no further restriction on λ(T ).

2. Assume s(T ) is free. With s∗ (T ) 6= s(T ), the perturbation q(T ) can take on

every arbitrary value. Since λ(T )q(T ) = 0 the Lagrange multiplier has to satisfy

λ(T ) = 0.

3. Assume s(T ) ≥ smin with smin . This is a combination of both previous cases:

Hence, either λ(T ) = 0 or q(T ) = 0.

The following theorem summarizes Pontryagin’s Maximum Principle zusammen:

Theorem 1 Let c∗ : [0, T ] → R and s∗ : [0, T ] → R continuous differentiable functions.

If the plan c∗ is optimal, then there exists a continuous differentiable function λ :

[0, T ] → R such that:

1. c∗ (t) maximizes the Hamilotnian and for an interior solution, we have

∂H

=0

∂c(t)

3

2. s∗ (t) and λ(t) are solutions to the system of differential equations

∂H

ṡ(t) =

∂λ(t)

∂H

λ̇(t) = −

∂s(t)

(b) If s(T ) is free, λ(T ) = 0

(c) If s(T ) ≥ smin , then λ(T ) ≥ 0, [s∗ (T )−smin ] ≥ 0 and λ(T )[s∗ (T )−smin ] = 0

adjust the boundary condition. The first order conditions remain the same.

T →∞

The optimization problem of the representative agent in the continues time neoclassical

growth model is Z ∞

max e−(ρ−n)t u(ĉ(t))dt

c(t) 0

subject to

K̇(t) = F (K(t), A(t)L(t)) − C(t) − δK(t), ∀t ∈ R+

L(t)

. Using lower case letters for variables in intensive form, we can

rewrite the constraint as

For convenience, drop the time dependency in the notation. We now proceed as follows:

Step 1: Set up the Hamiltonian

4

Step 2: Derive the first order conditions

∂H λ

= e−(ρ−n)t u0 (ĉ) − = 0 (6)

∂ĉ A

∂H

= λ[f 0 (k) − (δ + n + g)] = −λ̇ (7)

∂k

∂H

= f (k) − c − (δ + n + g)k = k̇ (8)

∂λ

Step 3: Solve the system of first order conditions. There is a trick that makes the

analysis very easy. First, solve equation (6) for λ and take the logarithm

λ̇ u00 (ĉ)

= −(ρ − n) + 0 ċ + g

λ u (ĉ)

We can now use this equation to substitute the growth rate of the Lagrange multiplier

out of equation (7) to arrive at the consumption Euler Equation

ĉ˙ u0 (ĉ) 0

= − 00 [f (k) − δ − ρ]

ĉ u (ĉ)ĉ

In the book by David Romer, you will most often find this Euler equation for CRRA

utility with θ as the coefficient of relative risk aversion. In per capita units, the Euler

Equation therefore reads

ĉ˙ 1

= [f 0 (k) − δ − ρ]

ĉ θ

and in per efficiency terms, the Euler equation is

ċ 1

= [f 0 (k) − δ − ρ] − g

c θ

Step 4: Use the boundary conditions to pin down the equilibrium (saddle) path of

consumption and physical capital, similar as we did it in class for the discrete time

case. We won’t do this here.

- content area lesson plan 2Uploaded byapi-253463428
- Ch4 Logs Ib PracticeUploaded byboostoberoi
- Paper_1Uploaded bySrilekhya Reddy
- SchedulingUploaded byAbdul Rahman
- Convegni BSC'03 LezionebcgUploaded byolivigo
- Assignment 2Uploaded byJames Anastasiou
- Lesson PlanUploaded byAli Faisal
- FECT Hera (Piping Presentation)Uploaded byanon_783076273
- D1,L9 Linear Programming.pptUploaded bymokhtarppg
- QANT520 Spring 2019 SyllabusUploaded byRahil Verma
- Search for an Optimal Solution to Vague Traffic Problems Using the PSK MethodUploaded byP.SENTHIL KUMAR
- Hurlstone 2012 2U TrialUploaded byuhhwot
- study of current transformer.pdfUploaded byMukesh Kumar
- Affinnova Fact Sheet - Intro to IDDEA IInUploaded bykhause9738
- A Novel Correlation for Prediction of Gas ViscosityUploaded byEuler Cauchi
- Flow Through Triangular Notch 000Uploaded byAbdul Razak Kaladgi
- The Project Life CycleUploaded byAse Sharew
- Suggested+Solutions+NPMaCVT05V1Eng+Part+I+Problems++1 10Uploaded byEpic Win
- 15.IJMPERDAPR201915Uploaded byTJPRC Publications
- LagrangeUploaded bySayan Sarkar
- v4-12-119.pdfUploaded byfasa9009
- Reactive Power Optimization Using Differential Evolution AlgorithmUploaded byseventhsensegroup
- HyperStudy Power PointUploaded byHumayun Nawaz
- Asm MethodUploaded byMarius Botezatu
- 2007 IEEE Wireless Comm - Automatic Optimization UMTSUploaded byOmar Nasr
- European Journal of Physics Volume 18 issue 6 1997 [doi 10.1088%2F0143-0807%2F18%2F6%2F013] Chow, Tai L -- Gauge transformations are canonical transformations.pdfUploaded byGuillermo Ramirez
- 6414ijma03Uploaded byPandian Ra
- 2795-8064-1-PBUploaded byhn_317
- HW_F94Uploaded byDiego Gonzáles
- Advanced Process ControlUploaded bybitted2

- Discrete Inverse Problem - Insight and AlgorithmsUploaded byTiep VuHuu
- Scalar Product of VectorsUploaded bySudibyo Gunawan
- Math132 NotesUploaded bySeth Killian
- 2012 Basic Business Statistics 12e Berenson TablesUploaded byMichael Brown
- AB34 Disks WashersUploaded byKarrie Heathers
- test15Uploaded byCarlo
- EMD AlgorithmUploaded byVikas Aryan
- Calculus - Volume 3Uploaded byaahz42
- Hasselmann - stochastic climate modelsUploaded byPeter Hanappe
- Inverse Function CompetencyUploaded bymarkvillaplaza
- VectorsUploaded byTanjim Islam
- Helgason - Sophus Lie, The MathematicianUploaded byZow Niak
- cbse-class-11-mathematics-sample-paper-sa1-2014-1.pdfUploaded bycerla
- ch-3Uploaded byAmsalu Walelign
- 12x_Lesson8_Pp4edUploaded byPi
- Physics Oct 2017Uploaded byMirza Fakhri Azmi
- [Theo_Fett]_Stress_intensity_factors,_T-stresses,_(b-ok.org).pdfUploaded byJay Srivastava
- Grade 8 - MTAPUploaded byS. C.
- Pitkanen - Local Zeta Functions & Rieman Zeta in TGD (2007)Uploaded byuniversallibrary
- Metode Elemen HinggaUploaded byFauziaKusumawardhani
- Worksheet FA1Uploaded byMaths Dept
- u4.81.04Uploaded bylbo33
- Success Maths SPM 2014 (Pocket F4)Uploaded byJason Lim
- exam1solUploaded byspitzersglare
- Pupil Book 5-7 Unit 01Uploaded bysabinayou
- VectorsUploaded bySarathKanthYalmarthy
- 11_819Uploaded byAnonymous A8A7zTEmq
- 02.Inverse Trigonometric FunctionsUploaded byAkash Sharma
- Ch04_SE.pdfUploaded bysqkid
- Mathematics 2015 Unsolved Paper Outside Delhi.pdfUploaded bysagar