NUMERICAL SIMULATION OF NONOPTIMAL DYNAMIC EQUILIBRIUM MODELS

Authors

  • ZHIGANG FENG,

    1. Purdue University, U.S.A.
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  • JIANJUN MIAO,

    1. Boston University, U.S.A.
    2. Central University of Finance and Economics, Zhejiang University, China
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  • ADRIAN PERALTA-ALVA,

    1. IMF, USA
    2. Federal Reserve Bank of Saint Louis, U.S.A.
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  • MANUEL S. SANTOS

    Corresponding author
    1. University of Miami, U.S.A.
    • Please address correspondence to: Manuel Santos, Department of Economics, University of Miami, P.O. Box 248126, Coral Gables, FL 33124. Phone: +1-305-284-3984. Fax: +1-305-284-2985. E-mail: m.santos2@miami.edu.

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    • An earlier version of this article was circulated as “Existence and Computation of Markov Equilibria for Dynamic Nonoptimal Economies” by J. Miao and M. Santos, March 2005. We thank Chanont Banternghansa and Jan Auerbach for their computational assistance. We are grateful to two anonymous referees and an editor for very helpful comments. Z. Feng would like to acknowledge financial support from NCCR-FINRISK. The usual disclaimer applies.


Abstract

In this article, we propose a recursive equilibrium algorithm for the numerical simulation of nonoptimal dynamic economies. This algorithm builds upon a convergent operator over an expanded set of state variables. The fixed point of this operator defines the set of all Markovian equilibria. We study approximation properties of the operator. We also apply our recursive equilibrium algorithm to various models with heterogeneous agents, incomplete financial markets, endogenous and exogenous borrowing constraints, taxes, and money.

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