Computing equilibria in infinite-horizon finance economies: The case of one asset

We develop methods to compute equilibria in dynamic models with incomplete asset markets and heterogeneous agents. Using spline interpolation methods we approximate recursive trading policies of the agents and the equilibrium pricing functions. We explore various methods for determining the coefficients of these approximations, including time iteration methods and acceleration techniques. Exploring the optimization errors implied by the approximate equilibrium rules we examine the quality of our results. The results are very encouraging since we are able to compute approximate equilibria in a few minutes or less, attaining optimization errors on the order of one dollar per million dollars of wealth.