Abstract
We present an intuitive homotopy algorithm for the computation of equilibria in the general equilibrium model with incomplete asset markets. The central concept is the introduction of utility maximization problems for all but one agent with penalties for transactions on the asset markets. We compute equilibria with homotopy path-following techniques using the first-order conditions of the agents' optimization problems and gradually lifting the penalty restriction as the algorithm proceeds. Finally, we present computational results from an implementation of the algorithm, showing convincingly that the algorithm is very reliable in general and suitable for large-scale computations.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 1375-1401 |
| Number of pages | 27 |
| Journal | Journal of Economic Dynamics and Control |
| Volume | 22 |
| Issue number | 8-9 |
| DOIs | |
| State | Published - Jul 3 1998 |
Funding
This paper is based in part on a chapter of my Ph.D. thesis. I am grateful to my advisor B. Curtis Eaves and to Gunnar Carlsson and Donald J. Brown for their guidance. In addition, I am very much indebted to Kenneth Judd for his many remarks and helpful comments that greatly improved the paper. Finally, I thank Felix Kubler for his constructive criticism of an earlier draft that resulted in numerous improvements. I gratefully acknowledge the support of NSF grant SBR-9309613.
Keywords
- C63
- C68
- Computation of equilibria
- General equilibrium
- Homotopy path-following
- Incomplete asset markets
- Penalty function
ASJC Scopus subject areas
- Economics and Econometrics
- Control and Optimization
- Applied Mathematics