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Approximate recursive equilibrium with minimal state space

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  • Raad, Rodrigo Jardim

Abstract

This paper shows existence of approximate recursive equilibrium with minimal state space in an environment of incomplete markets. We prove that the approximate recursive equilibrium implements an approximate sequential equilibrium which is always close to a Magill and Quinzii equilibrium without short sales for arbitrarily small errors. This implies that the competitive equilibrium can be implemented by using forecast statistics with minimal state space provided that agents will reduce errors in their estimates in the long run. We have also developed an alternative algorithm to compute the approximate recursive equilibrium with incomplete markets and heterogeneous agents through a procedure of iterating functional equations and without using the rst order conditions of optimality.

Suggested Citation

  • Raad, Rodrigo Jardim, 2013. "Approximate recursive equilibrium with minimal state space," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 737, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    • Handle: RePEc:fgv:epgewp:737
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    References listed on IDEAS

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    1. Magill, Michael & Quinzii, Martine, 1996. "Incomplete markets over an infinite horizon: Long-lived securities and speculative bubbles," Journal of Mathematical Economics, Elsevier, vol. 26(1), pages 133-170.
    2. Felix Kubler & Karl Schmedders, 2008. "Approximate Versus Exact Equilibria in Dynamic Economies," Lecture Notes in Economics and Mathematical Systems, in: Computational Aspects of General Equilibrium Theory, pages 135-163, Springer.
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    6. Kubler, Felix & Schmedders, Karl, 2002. "Recursive Equilibria In Economies With Incomplete Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 6(2), pages 284-306, April.
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    Cited by:

    1. Damián Pierri, 2021. "Useful Results for the Simulation of Non-Optimal Economies with Heterogeneous Agents," Working Papers 156, Universidad de San Andres, Departamento de Economia, revised Aug 2021.

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