Create a time series from the simulated panel

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Use a value function iteration routine to solve the dynamic optimization problem with a firm when there are nonconvex adjustment costs. Suppose that there is a panel of such firms. Use the resulting policy functions to simulate the time series of aggregate investment. Then use a value function iteration routine to solve the dynamic optimization problem with a firm when there are quadratic adjustment costs. Create a time series from the simulated panel. How well can a quadratic adjustment cost model approximate the aggregate investment time series created by the model with nonconvex adjustment costs? Add in variations in the price of new capital into the optimization problem given in (8.21). How would you use this to study the impact of, say, an investment tax credit?

Reference no: EM131264034

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