Variational inequalities for international general financial equilibrium modeling and computation

In this paper, a variational inequality approach for modeling competitive general international financial equilibrium is presented, within which general utility functions and taxes, transaction costs, and price policy interventions are explicitly incorporated. The paper examines taxes that depend both on the origin and on the type of investing sector, and price policy interventions that allow the monetary authorities to set upper and lower prices for all instruments and currencies. The optimal composition of assets and liabilities for each sector of each country, as well as the prices of the instruments and the exchange rates, in terms of a basic currency are obtained. We present both qualitative properties of the equilibrium pattern, and propose an algorithm for the computation of the pattern along with convergence results. Finally, we study the special case where the utility function is quadratic and we apply the proposed algorithm in order to compute the equilibrium pattern for a series of numerical examples.