General financial equilibrium with policy interventions: a variational inequality approach

In this paper a model of general financial equilibrium with policy interventions is introduced, which yields the optimal composition of assets and liabilities in each sector's portfolio, as well as the market prices for each instrument. The policy interventions considered are taxes and price ceilings. The variational inequality formulation of the equilibrium conditions is derived and then utilized to establish existence and uniqueness properties of the solution pattern. An algorithm is proposed for the computation of the problem. Finally, the algorithm is applied to some special utility functions as numerical examples.

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