Damián Pierri, Kevin Reffett
2019-05-30 - This paper presents a flexible and yet computable markovian equilibrium notion, called Generalized Markov Equilibrium (GME), that is suitable for a class of macro models typically used to represent financial crises in emerging countries. This type of equilibrium is able to represent a larger fraction of the (multiple) sequential equilibrium set, when compared with the typically used minimal state space recursive equilibrium (MSSRE). Thus, it incorporates the role of "memory", which characterize the sequential equilibria, to a recursive representation. For a particular model in the mentioned class (i.e. small open economy models), we show that there exist an ergodic GME which at the same time replicates all the observed phases in a macro crises (boom, collapse and recovery / spiralized recession). Moreover, this equilibrium, due to its ergodic nature, is able to capture the stylized behavior of data. For a GME, we also derive a computation and a calibration method that captures the short and long run behavior of data accurately. Finally, we show the existence and characterize a MSSRE using a constructive method, which allows us to derive a convergent algorithm and robust comparative statics. This procedure uses a different state space when compared with the standard practice and, contrarily to a "Ramsey" approach, allows to assess the effects of alternative economic policies directly in the decentralized equilibrium.