Dynamic General Equilibrium Modelling

Modern business cycle theory and growth theory use stochastic dynamic general equilibrium models. To solve these models, economists need to employ various mathematical tools. This book presents different methods to compute the dynamics of general equilibrium models. In part I, the representative-agent stochastic growth model is solved using value function iteration, linear and linear quadratic approximation methods, parameterized expectations, and projection methods. To apply these methods, fundamentals from numerical analysis are reviewed in detail. In particular, the book addresses issues often neglected in existing work on computational methods, such as how to find a good initial value. In part II, the authors discuss methods to solve heterogeneous-agent economies. In such economies, the distribution of the individual state variables is examined.