Approximate versus exact equilibria in dynamic economies

Felix Kubler*, Karl H Schmedders

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

This paper develops theoretical foundations for an error analysis of approximate equilibria in dynamic stochastic general equilibrium models with heterogeneous agents and incomplete financial markets. While there are several algorithms that compute prices and allocations for which agents first-order conditions are approximately satisfied (approximate equilibria), there are few results on how to interpret the errors in these candidate solutions and how to relate the computed allocations and prices to exact equilibrium allocations and prices. We give a simple example to illustrate that approximate equilibria might be very far from exact equilibria. We then interpret approximate equilibria as equilibria for close-by economies; that is, for economies with close-by individual endowments and preferences. We present an error analysis for two models that are commonly used in applications, an overlapping generations (OLG) model with stochastic production and an asset pricing model with infinitely lived agents. We provide sufficient conditions that ensure that approximate equilibria are close to exact equilibria of close-by economies. Numerical examples illustrate the analysis.

Original languageEnglish (US)
Title of host publicationComputational Aspects of General Equilibrium Theory
Subtitle of host publicationRefutable Theories of Value
Pages135-163
Number of pages29
DOIs
StatePublished - Oct 17 2008

Publication series

NameLecture Notes in Economics and Mathematical Systems
Volume604
ISSN (Print)0075-8442

Keywords

  • Approximate equilibria
  • Backward error analysis
  • Computational economics
  • Dynamic stochastic general equilibrium
  • Perturbed economy

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)
  • Mathematics (miscellaneous)

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  • Cite this

    Kubler, F., & Schmedders, K. H. (2008). Approximate versus exact equilibria in dynamic economies. In Computational Aspects of General Equilibrium Theory: Refutable Theories of Value (pp. 135-163). (Lecture Notes in Economics and Mathematical Systems; Vol. 604). https://doi.org/10.1007/978-3-540-76591-2_10