Solving the Stochastic Growth Model by Policy-Function Iteration

This article describes a computer algorithm that solves the stochastic growth model by iterating on a fixed-point equation in the decision rule determining consumption as a function of the state variables. This algorithm does not discretize the state space, but rather it preserves the continuous domain of the capital stock and the productivity shock. The main advantage of this algorithm is that it is based on a Euler equation and thus it has a straightforward generalization to dynamic economies that cannot be solved by a central planner, such as a non-Pareto optimal competitive economy.