Computing General Economic Equilibrium with Incomplete Markets, Collateral and Default Penalties

General economic equilibrium with incomplete markets and default represents the most general tool in competitive economic theory, and has led to fundamental insights into the behavior of real and financial markets. However, the current approach to the computation of general equilibrium with default, based on homotopy methods, does not scale well to complex economic models. In this article, the computation of general equilibrium with incomplete markets, collateral and default penalties is treated as a nonlinear programming problem and solved by an optimization procedure for large computation based on Augmented Lagrangian methods. We illustrate the proposed method by computing equilibria for some examples, showing its robustness and efficiency.