Running Head: Simulation of Dynamic Economies Numerical Simulation of Nonoptimal Dynamic Equilibrium Models

In this paper we propose a recursive equilibrium algorithm for the numerical simulation of nonoptimal dynamic economies. This algorithm builds upon a convergent operator over an expanded set of state variables. The fixed point of this operator defines the set of all Markovian equilibria. We study approximation properties of the operator. We also apply our recursive equilibrium algorithm to various models with heterogeneous agents, incomplete financial markets, endogenous and exogenous borrowing constraints, taxes, and money. JEL Classification: C6, D5, E2.