Cyclic Variables and Infinite Horizon Structural Dynamic Models

Abstract

In this paper, I develop Cyclic Value Function Iteration (CVFI), which is an adjustment to the value function iteration. When using this algorithm, the inclusion of cyclic variables of any size into the state space of an infinite horizon dynamic structural model does not increase the computational complexity of solving for the value function. This result is proven theoretically, and shown to closely hold in practice using Monte Carlo simulations.