Computing Equilibria in the General Equilibrium Model with Incomplete Asset Markets, Journal of Economic Dynamics and Control
We present an intuitive homotopy algorithm for the computation of equilibria in the general equilibrium model with incomplete asset markets. The central concept is the introduction of utility maximization problems for all but one agent with penalties for transactions on the asset markets. We compute equilibria with homotopy path-following techniques using the first-order conditions of the agents' optimization problems and gradually lifting the penalty restriction as the algorithm proceeds. Finally, we present computational results from an implementation of the algorithm, showing convincingly that the algorithm is very reliable in general and suitable for large-scale computations.
Schmedders, Karl. 1998. Computing Equilibria in the General Equilibrium Model with Incomplete Asset Markets. Journal of Economic Dynamics and Control. 22(8-9): 1375-1401.