Approximating Infinite-Horizon Models in a Complementarity Format: A Primer in Dynamic General Equilibrium Analysis

Morten Lau, Andreas Pahlke, Thomas F. Rutherford

Research output: Contribution to journalJournal articlepeer-review

Abstract

We demonstrate the advantages of the complementarity formulation for approximating infinite-horizon equilibria in neoclassical growth models as compared with techniques originally developed for optimal planning models. The complementarity approach does not require an ex ante specification of the growth rate in the terminal period and is therefore suitable for models with endogenous growth or short time horizons. We also consider approximation issues in models with multiple infinitely lived agents. Changes in net indebtedness over a finite period are estimated as part of the model to obtain a precise approximation of the infinite-horizon equilibria with a small number of time periods.
Original languageEnglish
JournalJournal of Economic Dynamics and Control
Volume26
Issue number4
Pages (from-to)577-609
ISSN0165-1889
DOIs
Publication statusPublished - Apr 2002
Externally publishedYes

Keywords

  • Intertemporal Optimization
  • Infinite-horizon Equilibria
  • terminal Constraints

Cite this