Dynamic Programming

Dynamic programming is one of the most fundamental building blocks of modern macroeconomics. It gives us the tools and techniques to analyse (usually numerically but often analytically) a whole class of models in which the problems faced by economic agents have a recursive nature. recursive problems pervade macroeconomics: any model in which agents face repeated decision problems tends to have a recursive formulation. This lecture introduces two key concepts: the value function and value function iterations. To fully understand the intuition of dynamic programming, we begin with simple models that are deterministic. Models which are stochastic and nonlinear will be considered in future lectures.