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Economic modeling approaches: optimization versus equilibrium

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  • Olga Kiuila

    ()
    (Faculty of Economic Sciences, University of Warsaw)

  • Thomas F. Rutherford

    ()
    (ETH Zurich, Centre for Energy Policy and Economics)

Abstract

The paper discusses three general classes of nonlinear programming models. Our objective is to show how to represent optimization problem, such as nonlinear programs, in a compact format using extended mathematical programming. This is a useful tool, especially in cases when complementarity representation, such as mixed complementarity problems, could be difficult to apply. We reflect on the special features of the abstract neoclassical growth model with infinite horizon and illustrate four distinct approaches to computing equilibrium transition paths. The relationship between optimization and equilibrium modeling is explored. We conclude with a test of a new model representation (extended mathematical programming) using two common general equilibrium studies in the literature: Ramsey and Negishi. The new framework allows to define complementarity problems for a model formulated as an optimization problem, thus the resulting model becomes in fact a complementarity problem.

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File URL: http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP121.pdf
File Function: First version, 2014
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Bibliographic Info

Paper provided by Faculty of Economic Sciences, University of Warsaw in its series Working Papers with number 2014-04.

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Length: 32 pages
Date of creation: 2014
Date of revision:
Handle: RePEc:war:wpaper:2014-04

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Related research

Keywords: nonlinear programming; complementarity programming; extended mathematical programming; computable general equilibrium modeling; infinite horizon;

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  1. Lau, Morten I. & Pahlke, Andreas & Rutherford, Thomas F., 2002. "Approximating infinite-horizon models in a complementarity format: A primer in dynamic general equilibrium analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 577-609, April.
  2. Victor Ginsburgh & Ludo Van der Heyden, 1988. "On extending the Negishi approach to computing equilibria: the case of government price support policies," ULB Institutional Repository 2013/1741, ULB -- Universite Libre de Bruxelles.
  3. Victor Ginsburgh & Michiel Keyzer, 2002. "The structure of applied general equilibrium models," ULB Institutional Repository 2013/3313, ULB -- Universite Libre de Bruxelles.
  4. Bohringer, Christoph & Loschel, Andreas & Rutherford, Thomas F., 2007. "Decomposing the integrated assessment of climate change," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 683-702, February.
  5. van Geldrop, Jan H. & Withagen, Cees A. A. M., 1994. "General equilibrium in an economy with exhaustible resources and an unbounded horizon," Journal of Economic Dynamics and Control, Elsevier, vol. 18(5), pages 1011-1035, September.
  6. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
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