Recursive competitive equilibrium
Encyclopedia
In macroeconomics
, recursive competitive equilibrium (RCE) is an equilibrium concept
. It has been widely used in exploring a wide variety of economic issues including business-cycle fluctuations, monetary and fiscal policy, trade related phenomena, and regularities in asset price co-movements. This is the equilibrium associated with dynamic programs
that represent the decision problem when agents must distinguish between aggregate and individual state variable
s. These state variables embody the prior and current information of the economy. The decisions and the realizations of exogenous uncertainty determine the values of the state variables in the next sequential time period. Hence the problem is recursive. A RCE is characterized by time invariant functions of a limited number of ‘state variables’, which summarize the effects of past decisions and current information. These functions (decision rules) include (a) a pricing function, (b) a value function, (c) a period allocation policy specifying the individual’s decision, (d) period allocation policy specifying the decision of each firm and (e) a function specifying the law of motion of the capital stock. Since decisions are made with all relevant information available, it is a rational expectations
equilibrium.
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
, recursive competitive equilibrium (RCE) is an equilibrium concept
Economic equilibrium
In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal...
. It has been widely used in exploring a wide variety of economic issues including business-cycle fluctuations, monetary and fiscal policy, trade related phenomena, and regularities in asset price co-movements. This is the equilibrium associated with dynamic programs
Dynamic programming
In mathematics and computer science, dynamic programming is a method for solving complex problems by breaking them down into simpler subproblems. It is applicable to problems exhibiting the properties of overlapping subproblems which are only slightly smaller and optimal substructure...
that represent the decision problem when agents must distinguish between aggregate and individual state variable
State variable
A state variable is one of the set of variables that describe the "state" of a dynamical system. Intuitively, the state of a system describes enough about the system to determine its future behaviour...
s. These state variables embody the prior and current information of the economy. The decisions and the realizations of exogenous uncertainty determine the values of the state variables in the next sequential time period. Hence the problem is recursive. A RCE is characterized by time invariant functions of a limited number of ‘state variables’, which summarize the effects of past decisions and current information. These functions (decision rules) include (a) a pricing function, (b) a value function, (c) a period allocation policy specifying the individual’s decision, (d) period allocation policy specifying the decision of each firm and (e) a function specifying the law of motion of the capital stock. Since decisions are made with all relevant information available, it is a rational expectations
Rational expectations
Rational expectations is a hypothesis in economics which states that agents' predictions of the future value of economically relevant variables are not systematically wrong in that all errors are random. An alternative formulation is that rational expectations are model-consistent expectations, in...
equilibrium.