Solution of Perfect Foresight Saddlepoint Problems: A Simple Method and Applications

Economists frequently confine themselves to the qualitative analysis of continuous optimization problems or they restrict their quantitative analysis to inaccurate methods like linearization around the steady state. The fact that the solution is characterized by an inherently unstable adjustment path arriving at a boundary value in infinite time, however, does not necessarily imply a complicated solution method. The paper explains and demonstrates the method of backward integration, a recursive solution method that does not only reveal the exact adjustment path but that is also very easy to use.