MULTIDIMENSIONAL TRANSITIONAL DYNAMICS: A SIMPLE NUMERICAL PROCEDURE

Abstract

We propose the relaxation algorithm as a simple and powerful method for determining the transition process in growth models numerically. This method has a number of important advantages: (1) It can easily deal with a wide range of dynamic systems including stiff differential equations and systems giving rise to a continuum of stationary equilibria. (2) The application of the procedure is fairly user-friendly. The only input required consists of the dynamic system. (3) The variant of the relaxation algorithm we propose exploits in a natural manner the infinite time horizon, which usually underlies optimal control problems in economics. As an illustrative application, we compute the transition process of the models of Jones [Jones, C.I. (1995) R&D-based models of economic growth. Journal of Political Economy 103 (3), 759–784] and Lucas [Lucas, R.E., Jr. (1988) On the mechanics of economic development. Journal of Monetary Economics 22, 3–42].