Dsge modelling using dynare

[DiegoHidaFl]

How to choose the state variables in a dynamic programming

A state variable is everything that cannot be changed at time t. For example, the capital stock k_ {t-1} in your stock at the end of period notation is a state, because it is used for production at time t, but cannot be changed anymore at time t, because that would require changing yesterday’s investment (i_{t-1}). This is the general rule: everything that is relevant at time t, but cannot be changed anymore is a state. The example you describe is special in the respect that the authors are on…