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 A state variable is one of the set of variables that are used to describe the mathematical "state" of a dynamical system. Intuitively, the state of a system describes enough about the system to determine its future behaviour in the absence of a ...

s. These state variables embody the prior and current information of the economy. The decisions and the realizations of

exogenous In a variety of contexts, exogeny or exogeneity () is the fact of an action or object originating externally. It contrasts with endogeneity or endogeny, the fact of being influenced within a system. Economics In an economic model, an exogeno ...

uncertainty determine the values of the

s 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 In economics, "rational expectations" are model-consistent expectations, in that agents inside the model are assumed to "know the model" and on average take the model's predictions as valid. Rational expectations ensure internal consistency i ...

equilibrium.

References

Macroeconomic theories Economics and time {{Macroeconomics-stub