Approximating the stochastic growth model with neural networks trained by genetic algorithms

Abstract

In this thesis study, we present a direct numerical solution methodology for the onesector nonlinear stochastic growth model. Rather than parameterizing or dealing with the Euler equation, like other methods do, our method directly parameterizes the policy function with a neural network trained by a genetic algorithm. Since genetic algorithms are derivative free and the policy function is directly parameterized, there is no need for taking derivatives. While other methods are bounded by the existence of required derivatives in higher dimensional state spaces, our method preserves its functionality. As genetic algorithms are global search algorithms, our method’s results are robust whatever the search space is. In addition to the stochastic growth model, to observe the performance of the method under real conditions, we tested the method by adding capital adjustment costs to the model. Under all parameter configurations, the method performs quite well.