Numerical Simulation of Nonoptimal Dynamic Equilibrium Models

In this paper we present a recursive method for the numerical simulation of nonoptimal dynamic equilibrium models. This method builds upon a convergent operator over an expanded set of state variables. The fixed point of this operator defines the set of all Markovian equilibria. We study approximation properties of the operator as well as the convergence of the moments of simulated sample paths. We apply our numerical algorithm to various models with heterogeneous agents, incomplete financial markets, endogenous and exogenous borrowing constraints, taxes, and money