A projected dynamical systems model of general financial equilibrium with stability analysis

In this paper, we present a dynamic model of general financial equilibrium. The model assumes utility-maximizing sectors in the economy that take the prices of the financial instruments as given. The economy, in turn, determines prices of the instruments that balance the supplies and demands. The financial adjustment process is shown to satisfy a projected dynamical system. This methodology is then used to establish, under certain conditions on the utility functions, both the stability and the asymptotical stability of the equilibrium asset, liability, and price pattern. This approach unveils a dynamic approach to competitive equilibrium problems that have, heretofore, been studied, principally, in the static framework of finite-dimensional variational inequality theory.