Abstract
This paper studies the income fluctuation problem without imposing bounds on utility, assets, income or consumption. We prove that the Coleman operator is a contraction mapping over the natural class of candidate consumption policies when endowed with a metric that evaluates consumption differences in terms of marginal utility. We show that this metric is complete, and that the fixed point of the operator coincides with the unique optimal policy. As a consequence, even in this unbounded setting, policy function iteration always converges to the optimal policy at a geometric rate.
Original language | English |
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Pages (from-to) | 353-365 |
Number of pages | 13 |
Journal | Journal of Economic Dynamics and Control |
Volume | 45 |
DOIs | |
Publication status | Published - Aug 2014 |