Value function iterations with transition matrix

We consider the following aggregate model with transition matrix

where

together with

We continue to use the same algorithm:

(1) Set a grid consisting of k and k' columnwise and rowwise respectively.

(2) Calculate utility for consumption as U using the grid matrix above.

(3) Starting from a certain v, update v1=U+beta*P*v' so as to maximize v1.

(a) Find the corresponding k’ from (3) in value function iterations.

(b) Calculate utility from k and k’ as r.

(c) Starting from a certain vp, update vp1=U+beta*P*vp where vp is calculate by

vi=r+beta*P*vi_1

up until vi and vi_1 are almost the same

and set the final vi to vp.

(d) Repeat the whole thing by setting vp=vp1 until some criterion is met.

(4) Repeat (3) by setting v=v1 for many times.

(5) Find the final corresponding value of k as k' according to the maximum value.

as yesterday’s.