The Relaxation of Complementary Slackness Conditions in Dynamic General Equilibrium Models

Abstract

We propose a description and explanation of a heuristic approach that can be used in applied dynamic economic models containing agent optimization problems. Solving such problems, we can obtain a system containing differential and algebraic equations, inequalities, and complementary slackness conditions. These conditions significantly complicate the analysis of such models even at the calibration stage. We show that the natural assumption about the alternation of regimes defined by the method of the resolution of the complementary slackness conditions allows us to pass to relations that are more regular and convenient from the point of view of the model’s calibration.