Recursive Competitive Equilibrium (RCE)
What Is Recursive Competitive Equilibrium (RCE)?
The term recursive competitive equilibrium (RCE) alludes to a concept used to investigate and study economic issues when supply and demand are equivalent. Recursive competitive equilibrium is a mathematical optimization method usually utilized in macroeconomics and is described by time-invariant equilibrium decision rules that determine activities as a function of a limited number of variables.
RCE assists analysts and financial experts with investigating different issues, for example, monetary and fiscal policy and business cycle changes.
How Recursive Competitive Equilibrium (RCE) Works
Recursive competitive equilibrium is an optimization concept portrayed by time-invariant equilibrium decision rules inside the economy. These rules frame activities as a function of a limited number of variables. These variables, which are usually alluded to as state variables, sum up how past decisions and current data are impacted.
The assumption with RCE is that every one of the variables included are current. Accordingly, previous data available in the economy is known. The decision rules for RCE incorporate a number of functions, which include:
- A pricing function
- A value function
- A period allocation policy illustrating the decision made by the consumer
- A period allocation policy illustrating the decision made by each firm
- A function that frames the law of movement of the capital stock
Thusly, RCE fundamentally sees what effect the functions, prices, value, and period allocation policies have on the variables, which is the data on the economy. Equilibrium objects are the functions rather than variables in RCE.
Economic agents with information on these variables evaluate the current state of the economy, including policies sanctioned by financial specialists (quite fiscal and monetary policy), as well as changes inside the business cycle. Their activities will determine, in part, the values of the variables in the next sequential time span. This makes the structure recursive.
An economic agent is a consumer, corporation, or organization that has an effect on the economy by buying, selling, or delivering.
Special Considerations
The RCE approach assumes that the consumer pursues all consumption choices, while a finite number of firms produce two goods — a consumable one and a capital one. These firms are able to augment their profit every period. It assumes firms purchase data sources and labor at competitive prices in the wake of surveying productivity toward the beginning of the period.
Consumers then, at that point, utilize their wages to buy goods from firms and the cycle begins once again every period. During this period, firms don't hold their assets (since they're sold) and technology is uninhibitedly available. Some RCE models really assume an infinite-life, expanding value firm.
The RCE model assumes a fixed environment with regards to finding optimal growth. The assumption is that the issue doesn't change with time, consequently the recursive representation. Recursive problems are tackled paying little mind to time, where a sequential model solution relies upon the time span for which you're settling.
RCE permits analysts to zero in on different structures of the problem. The variables are predetermined and matter. They must, along these lines, fluctuate across time and state.
The recursive competitive theory was developed by Rajnish Mehra and Edward Prescott.
Recursive Competitive Equilibrium (RCE) and Macroeconomics
As referenced above, recursive competitive equilibrium falls under the study of macroeconomics. This is the study of the more extensive economy. Macroeconomics includes the study of more extensive economic trends and indicators, for example, national income, unemployment rates, and gross domestic product (GDP). It additionally studies the relationship of such economic factors as inflation, trade, consumption, and income.
Economic equilibrium happens when economic forces are balanced, which is otherwise called supply approaching demand. In a competitive equilibrium like RCE, supply equals demand. The RCE assists financial experts with determining the explanations behind short-term vacillations in the business cycle and longer-term explanations behind economic growth.
Features
- Recursive competitive equilibrium is an equilibrium concept used to investigate and study economic issues.
- RCE sees what effect the functions, prices, value, and period allocation policies have on data on the economy.
- It is generally utilized in macroeconomics, which is the more extensive study of the economy.
- The assumption with RCE is that every one of the variables included are current, and that means that previous data available in the economy is known.
- RCE is described by time-invariant equilibrium decision rules that determine activities as a function of a limited number of variables.
