General Financial Equilibrium Modeling with Policy Interventions and Transaction Costs.

In this paper we develop a general financial equilibrium model with policy interventions, in terms of taxes and price controls, and with transaction costs. The equilibrium conditions governing the financial model are derived and the equilibrium assets, liabilities, and instrument prices are shown to satisfy a variational inequality problem. The model is first studied qualitatively, in particular, in terms of existence and uniqueness of a solution pattern and then an algorithm is proposed and convergence results obtained. Finally, the algorithm is applied to compute the equilibrium asset, liability, and price pattern for the quadratic utility functions case. Citation Copyright 1996 by Kluwer Academic Publishers.