Approximate Versus Exact Equilibria in Dynamic Economies

Felix Kubler and Karl Schmedders ()
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Karl Schmedders: Northwestern University

A chapter in Computational Aspects of General Equilibrium Theory, 2008, pp 135-163 from Springer

Abstract: 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 h 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.

Keywords: Approximate equilibria; Backward error analysis; Perturbed economy; Dynamic stochastic general equilibrium; Computational economics (search for similar items in EconPapers)
Date: 2008
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Journal Article: Approximate versus Exact Equilibria in Dynamic Economies (2005)
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DOI: 10.1007/978-3-540-76591-2_10

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