Numerical methods in economics

June, 2011
Instructor
Alfonso Irarrazabal, Norges Bank
air@norges-bank.no
http://sites.google.com/site/alfonsoirarrazabalsite/
Date and place
From June 20th to June 24th at Blindern campus, University of Oslo
Course contents
This course covers basic tools of numerical analysis that can be used in micro and
macroeconomics. These techniques are usually used to solve, simulate and estimate
economics models. We will cover basic methods to solve systems of non-linear equa-
tions, numerical integration, optimization, montecarlo integration and simulation of
stochastic processes. We will apply these methods to calibration, numerical estimation
(non-linear, GMM and maximum likelihood), solving transitional dynamic problems,
dynamic programming and others.
The course will be computationally intensive. There will be three problem sets,
which will require the student to work on computational issues and applications.
Students are expected to replicate (the computational part) a relevant paper as a
nal examination.
To make good use of the course, it is important to get some matlab practice before
you start. The third week of May I will post on my webpage a set of simple sample
matlab tutorials and a set of exercises to practice basic programming techniques in
matlab. Below you will nd a more detailed outline of the contents for this course.
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Outline
DAY1: Basic numerical methods I
Solving system of equations (equilibrium concepts)
Numerical dierentiation and integration
Optimization
Lab 1: Simple examples: monopoly, simple general equilibrium, portfolio problem.
DAY2: Basic numerical methods II
Approximation methods
Montecarlo analysis
Solving dierential equations (shooting method)
Lab 2: Simulation of time series, markov chains, transitional dynamics in growth
models
DAY 3 Simulation
Distributions and montecarlo methods
Simulation of stochastic processes
Lab 3: simulation of markov chains,. random walks processes. Computing moments
from simulations.
DAY 4. Dynamic programming
Finite horizon dynamic programming (Cake eating problem)
Deterministic dynamic programming
Stochastic dynamic programming
Discrete choice and continuos choice examples
Lab 4: Stochastic growth model, resource economics problem, investment problem,
etc
DAY 5. Applications to economics
Application in micro and macroeconomics: A couple examples will be provided from
real applications.: Investment problem, models of rm dynamics, monetary models
with price adjustment etc.
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References
[1] Adda and Russell Cooper. Dynamic Programming: Theory and Applications. MIT
Press.
[2] Kenneth L. Judd. Numerical Methods in Economics. MIT Press, 1998.
[3] David R. Kincaid and E. Ward Cheney. Numerical Analysis. Mathematics of Sci-
entic Computing. Brooks Cole, 2001.
[4] Lars Ljungqvist and Thomas J. Sargent. Recursive Macroeconomic Theory.
[5] MIT Press, 2nd edition, 2004.
[6] Rust, J. (1993). Structural Estimation of Markov Decision Models. Chapter 51
in R. Engle and D.
[7] William H. Press, Saul A. Teukolsky, William T. Vetterling, and Brian P. Flannery.
Numerical Recipes. The Art of Scientic Computing. Third edition. Cambridge
University Press, 2007.
[8] Nancy L. Stokey and Robert E. Lucas. Recursive Methods in Economic Dynamics.
Harvard University Press, 1989.
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