Some useful results for the simulation of non optimal general equilibrium economies

Abstract

This paper investigates the empirical evaluation of infinite horizon non-optimal economies by means of numerical simulations. In particular, the paper answers the following question: is it possible to derive a general framework which guarantees that numerical simulations truly reflect the behavior of endogenous variables in the model?. Under mild assumptions, this paper provides an affirmative answer to this question for endowment economies with incomplete markets and infinitely many exogenous states. For this type of models, the paper presents an accurate calibration method. For economies with finitely many shocks, even under stronger assumptions, it is only possible to show that a numerically computable, time independent and recursive representation of the sequential equilibrium generates a stationary Markov process, which is a necessary condition to answer the above mentioned question.

Keywords: non-optimal economies, Markov equilibrium, numerical methods, simulations.