DYNAMIC MODELS · Solving dynamic models: Theory and Applications

The computation of equilibria in dynamic stochastic generalequilibrium models with heterogeneous agents has becomeincreasingly important in macroeconomics and publicfinance. For a given example-economy, i.e. a given specification ofpreferences, technologies and market-arrangements these methodscompute an (approximate) equilibrium and allow for quantitativestatements about one equilibrium of the example-economy.Through these so-called 'computational experiments'many economic insights can be obtained by analyzingquantitative features of realistically calibrated models.Unfortunately, economists often use ad hoc computational methodswith poorly understood properties that produce approximate solutionsof unknown quality.The research-project outlined in this proposalhas three goals: Building theoretical foundationsfor analyzing dynamic equilibrium models, developing efficient and stablealgorithms for the computation of equilibria in large scale models andapplying these algorithms to macroeconomic policy analysis.