Solving the stochastic growth model by using quadrature methods and value-function iterations

Abstract

This article presents a solution algorithm for the capital growth model. The algorithm uses value- function iterations on a discrete state space. The quadrature method is used to set the grid for the exogenous process, and a simple equispaced scheme in logarithms is used to set the grid for the endogenous capital process. The algorithm can produce a solution to within four-digit accuracy using a state space composed of 1,800 points in total. © 1990 American Statistical Association.