A Numerical Algorithm for Solving Models With Incomplete Markets

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Abstract
We describe an incomplete markets model and outline a numerical solution algorithm to compute its steady- state equilibrium. The model departs from the Arrow- Debreu world of complete contingent claims markets by assuming the presence of borrowing constraints. Solution methods that rely on approximations around some reference point or those that use the Euler equa tions in an interior solution are not suitable for the present model. Rather, we outline a numerical solution algorithm that discretizes the state space and the deci sion space and iterates on a numerical procedure that obtains the decision rules and distributions of agent types for all cohorts in an attempt to find the steady- state equilibrium of the model. The algorithm is imple mented using the Fortran compilers on the Minnesota CRAY X-MP and San Diego CRAY Y-MP/8-864.