Which Recursive Equilibrium - IU School of strongLiberalstrong Arts.pdf

Which Recursive Equilibrium? Manjira Datta, Leonard J. Mirman, Olivier F. Morand, Kevin Re§etty April, 2010 Preliminary and Incomplete Abstract We reconsider recent results on the existence and uniqueness of recur- sive equilibrium in the setting of a simple one-sector nonoptimal growth model with a state-contingent tax. We Örst extend the uniqueness result in Coleman [13] to a much larger class of functions (i.e., spaces of bounded functions). Even given this, we then show there exist other Öxed point pro- cedures that construct continuous recursive equilibrium outside the set of continous functions considered in Coleman [13]. The result point to the del- icate nature of existing uniqueness results. We then extend Colemanís pol- icy iteration approach to verify and construct (locally Lipschitz) continuous recursive equilibrium in economies previously thought not to possess them (e.g., the economy in Santos [51]). We show existing correspondence-based continuation methods (e.g., Miao and Santos [35]) do not, in general, ver- ify the existence of recursive equilibrium (even for simple one-dimensional cases). We propose a new correspondence-based continuation method (val- ued in function spaces) which does verify the existence of recursive equilib- rium. We thank the participants a workshop at Jadavpur University, Kolkata, India during March 2009, the Sorbonne Workshop for Economic Theory held in Paris, June 2009, as well as Adrian Peralta-Alva, Rajnesh Mehra, Ed Prescott, Manuel Santos, Yiannis Vailakis, ukasz Wozny, ¥ and especially, Robert Becker for