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Self-justi ed equilibria: Existence and computation

Felix Kubler () and Simon Scheidegger

No 694, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper we introduce self-justi ed equilibrium as a solution concept in stochastic general equilibrium models with a large number of heterogeneous agents. In each period agents trade in assets to maximize the sum of current utility and forecasted future utility. Current prices ensure that markets clear and agents forecast the probability distribution of future prices and consumption on the basis of current endogenous variables and the current exogenous shock. The forecasts are self-justi ed in the sense that agents use forecasting functions that are optimal within a given class of functions and that can be viewed as optimally trading o the accuracy of the forecast and its complexity. We show that self-justi ed equilibria always exist and we develop a computational method to approximate them numerically. By restricting the complexity of agents' forecasts we can solve models with a very large number of heterogeneous agents. Errors can be directly interpreted.

New Economics Papers: this item is included in nep-dge
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:694

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