Concepts of Equilibrium and their Role in Economic Simulation Models

This paper considers the role of equilibrium concepts in economic simulation models. The paper defines different types of equilibria and describes their importance in simulation models in terms of their power to describe empirically the results of disequilibrium adjustment processes that then need not be explicitly modelled. The paper addresses the issue of the validity of different equilibrium concepts as “descriptive” or “realistic” and considers the “domain of applicability” of different types of equilibria in different economic models. Examples are drawn from various classes of models: CGE (static and dynamic), DSGE, macroeconomic, multi-market, microsimulation, agent-based, and game theoretic. The focus is on constructing "realistic" or "valid" empirical simulation models that rely on economic equilibrium concepts. Equilibrium concepts are very powerful in simplifying the construction of simulation models in that they obviate the need to incorporate disequilibrium adjustment processes in the models. They improve model clarity and simplicity, avoiding the "black box" syndrome common in simulation model. Suggest standards for judging the degree of realism of different economic simulation models, and for approaches to empirical validation.