NATIONAL BUREAU OF ECONOMIC RESEARCH
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FiPIt: A Simple, Fast Global Method for Solving Models with Two Endogenous States & Occasionally Binding Constraints

Enrique G. Mendoza, Sergio Villalvazo

NBER Working Paper No. 26310
Issued in September 2019
NBER Program(s):International Finance and Macroeconomics

We propose a simple and fast fixed-point iteration algorithm FiPIt to obtain the global, non-linear solution of macro models with two endogenous state variables and occasionally binding constraints. This method uses fixed-point iteration on Euler equations to avoid solving two simultaneous nonlinear equations (as with the time iteration method) or creating modified state variables requiring irregular interpolation (as with the endogenous grids method). In the small-open-economy RBC and Sudden Stops models provided as examples, FiPIt is used on the bonds and capital Euler equations to solve for the bonds decision rule and the capital pricing function. In a standard Matlab platform, FiPIt solves both models much faster than time iteration and various hybrid methods. The choice of functions that FiPIt iterates on using the Euler equations can vary across models, and there can be more that one arrangement for the same model.

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Document Object Identifier (DOI): 10.3386/w26310

Published: Enrique G. Mendoza & Sergio Villalvazo, 2020. "FiPIt: A simple, fast global method for solving models with two endogenous states & occasionally binding constraints," Review of Economic Dynamics, .

 
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