
on Dynamic General Equilibrium 
By:  Rubens Penha Cysne (EPGE/FGV) 
Date:  2004–08 
URL:  http://d.repec.org/n?u=RePEc:fgv:epgewp:557&r=dge 
By:  Rubens Penha Cysne (EPGE/FGV) 
Date:  2004–08 
URL:  http://d.repec.org/n?u=RePEc:fgv:epgewp:558&r=dge 
By:  Rubens Penha Cysne (EPGE/FGV) 
Date:  2004–08 
URL:  http://d.repec.org/n?u=RePEc:fgv:epgewp:559&r=dge 
By:  Rubens Penha Cysne (EPGE/FGV) 
Date:  2004–08 
URL:  http://d.repec.org/n?u=RePEc:fgv:epgewp:561&r=dge 
By:  Rubens Penha Cysne (EPGE/FGV) 
Date:  2004–08 
URL:  http://d.repec.org/n?u=RePEc:fgv:epgewp:562&r=dge 
By:  Altig, David (Federal Reserve Bank of Cleveland); Christiano, Lawrence (Northwestern University); Eichenbaum, Martin (Northwestern University); Lindé, Jesper (Research Department, Central Bank of Sweden) 
Abstract:  Macroeconomic and microeconomic data paint conflicting pictures of price behavior. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model which resolves this apparent micro  macro conflict. Our model is consistent with postwar U.S. evidence on inflation inertia even though firms reoptimize prices on average once every 1.5 quarters. The key feature of our model is that capital is firmspecific and predetermined within a period. 
Keywords:  Technology shocks; Firmspecific capital; Monetary policy; Nominal rigidities; Real rigidities; Business cycles 
JEL:  E30 E40 E50 
Date:  2004–12–01 
URL:  http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0176&r=dge 
By:  Morten O. Ravn; Stephanie SchmittGrohe; Martin Uribe 
Abstract:  This paper explores the macroeconomic consequences of preferences displaying a subsistence point. It departs from the existing related literature by assuming that subsistence points are specific to each variety of goods rather than to the composite consumption good. We show that this simple feature makes the price elasticity of demand for individual goods procyclical. As a result, markups behave countercyclically in equilibrium. This implication is in line with the available empirical evidence. 
JEL:  D10 D12 D42 E30 
Date:  2004–12 
URL:  http://d.repec.org/n?u=RePEc:nbr:nberwo:11012&r=dge 
By:  GoergeMarios Angeletos; LaurentEmmanuel Calvet 
Abstract:  We investigate a neoclassical economy with heterogeneous agents, convex technologies and idiosyncratic production risk. Combined with precautionary savings, investment risk generates rich effects that do not arise in the presence of pure endowment risk. Under a finite horizon, multiple growth paths and endogenous fluctuations can exist even when agents are very patient. In infinitehorizon economies, multiple steady states may arise from the endogeneity of risktaking and interest rates instead of the usual wealth effects. Depending on the economy's parameters, the local dynamics around a steady state are locally unique, totally unstable or locally undetermined, and the equilibrium path can be attracted to a limit cycle. The model generates closedform expressions for the equilibrium dynamics and easily extends to a variety of environments, including heterogeneous capital types and multiple sectors. 
JEL:  D51 D52 D92 E20 E32 
Date:  2004–12 
URL:  http://d.repec.org/n?u=RePEc:nbr:nberwo:11016&r=dge 
By:  David Andolfatto (Simon Fraser University); Glenn MacDonald (Washington University in St. Louis) 
Abstract:  Historically, when an economy emerges from recession, employment grows with, or soon after, the resumption of GDP growth. However, following the two most recent recessions in the United States, employment growth has lagged the recovery in GDP by several quarters, a phenomenon thathas been termed the 'jobless recovery.' To many, a jobless recovery defies explanation since it violates both historical patterns and the predictions of traditional macro theory. We show that a recession followed by a jobless recovery is precisely what neoclassical theory predicts when new technology impacts different sectors of the economy unevenly and is slow to diffuse, and sectoral adjustments in the labor market take time to unfold. 
JEL:  E 
Date:  2004–12–30 
URL:  http://d.repec.org/n?u=RePEc:wpa:wuwpma:0412014&r=dge 
By:  Jesus FernandezVillaverde (Department of Economics, University of Pennsylvania); Juan F. RubioRamirez (Federal Reserve Bank of Atlanta) 
Abstract:  This paper presents a framework to undertake likelihoodbased inference in nonlinear dynamic equilibrium economies. We develop a Sequential Monte Carlo algorithm that delivers an estimate of the likelihood function of the model using simulation methods. This likelihood can be used for parameter estimation and for model comparison. The algorithm can deal both with nonlinearities of the economy and with the presence of nonnormal shocks. We show consistency of the estimate and its good performance in finite simulations. This new algorithm is important because the existing empirical literature that wanted to follow a likelihood approach was limited to the estimation of linear models with Gaussian innovations. We apply our procedure to estimate the structural parameters of the neoclassical growth model. 
Keywords:  LikelihoodBased Inference, Dynamic Equilibrium Economies, Nonlinear Filtering, Sequential Monte Carlo) 
JEL:  C10 C11 C13 C15 
Date:  2004–01–06 
URL:  http://d.repec.org/n?u=RePEc:pen:papers:04001&r=dge 
By:  Jesus FernandezVillaverde (Department of Economics, University of Pennsylvania); Juan F. RubioRamirez (Federal Reserve Bank of Atlanta) 
Abstract:  This paper presents some new results on the solution of the stochastic neoclassical growth model with leisure. We use the method of Judd (2003) to explore how to change variables in the computed policy functions that characterize the behavior of the economy. We find a simple closeform relation between the parameters of the linear and the loglinear solution of the model. We extend this approach to a general class of changes of variables and show how to find the optimal transformation. We report how in this way we reduce the average absolute Euler equation errors of the solution of the model by a factor of three. We also demonstrate how changes of variables correct for variations in the volatility of the economy even if we work with first order policy functions and how we can keep a linear representation of the laws of motion of the model if we use a nearly optimal transformation. 
Keywords:  Dynamic Equilibrium Economies, Computational Methods, Changes of Variables, Linear and Nonlinear Solution Methods. 
JEL:  C63 C68 E37 
Date:  2003–11–23 
URL:  http://d.repec.org/n?u=RePEc:pen:papers:04002&r=dge 
By:  Jesus FernandezVillaverde (Department of Economics, University of Pennsylvania); Juan F. RubioRamirez (Federal Reserve Bank of Atlanta); S. Boragan Aruoba (Department of Economics, University of Maryland) 
Abstract:  This paper compares solution methods for dynamic equilibrium economies. We compute and simulate the stochastic neoclassical growth model with leisure choice using Undetermined Coefficients in levels and in logs, Finite Elements, Chebyshev Polynomials, Second and Fifth Order Perturbations and Value Function Iteration for several calibrations. We document the performance of the methods in terms of computing time, implementation complexity and accuracy and we present some conclusions about our preferred approaches based on the reported evidence. 
Keywords:  Dynamic Equilibrium Economies, Computational Methods, Linear and Nonlinear Solution Methods 
JEL:  C63 C68 E37 
Date:  2003–11–23 
URL:  http://d.repec.org/n?u=RePEc:pen:papers:04003&r=dge 
By:  Jesus FernandezVillaverde (Department of Economics, University of Pennsylvania); Juan F. RubioRamirez (Federal Reserve Bank of Atlanta) 
Abstract:  This paper compares two methods for undertaking likelihoodbased inference in dynamic equilibrium economies: a Sequential Monte Carlo filter proposed by FernándezVillaverde and RubioRamírez (2004) and the Kalman filter. The Sequential Monte Carlo filter exploits the nonlinear structure of the economy and evaluates the likelihood function of the model by simulation methods. The Kalman filter estimates a linearization of the economy around the steady state. We report two main results. First, both for simulated and for real data, the Sequential Monte Carlo filter delivers a substantially better fit of the model to the data as measured by the marginal likelihood. This is true even for a nearly linear case. Second, the differences in terms of point estimates, even if relatively small in absolute values, have important effects on the moments of the model. We conclude that the nonlinear filter is a superior procedure for taking models to the data. 
Keywords:  LikelihoodBased Inference, Dynamic Equilibrium Economies, Nonlinear Filtering, Kalman Filter, Sequential Monte Carlo 
JEL:  C10 C11 C13 C15 
Date:  2004–01–20 
URL:  http://d.repec.org/n?u=RePEc:pen:papers:04005&r=dge 
By:  César AlonsoBorrego (Department of Economics,Universidad Carlos III de Madrid); Jesús FernándezVillaverde (Department of Economics, University of Pennsylvania); José E. GaldónSánchez (Department of Economics,Universidad Publica de Navarra) 
Abstract:  Job security provisions are commonly invoked to explain the high and persistent European unemployment rates. This belief has led several countries to reform their labor markets and liberalize the use of fixedterm contracts. Despite how common such contracts have become after deregulation, there is a lack of quantitative analysis of their impact on the economy. To fill this gap, we build a general equilibrium model with heterogeneous agents and firing costs in the tradition of Hopenhayn and Rogerson (1993). We calibrate our model to Spanish data, choosing in part parameters estimated with firmlevel longitudinal data. Spain is particularly interesting, since its labor regulations are among the most protective in the OECD, and both its unemployment and its share of fixedterm employment are the highest. We find that fixed term contracts increase unemployment, reduce output, and raise productivity. The welfare effects are ambiguous. 
Keywords:  Fixedterm contracts, Firing costs, General equilibrium, Heterogeneous agents 
JEL:  E24 C68 J30 
Date:  2004–04–24 
URL:  http://d.repec.org/n?u=RePEc:pen:papers:04016&r=dge 
By:  Gueorgui Kambourov (Department of Economics, University of Toronto); Iourii Manovskii (Department of Economics, University of Pennsylvania) 
Abstract:  In this study we argue that wage inequality and occupational mobility are intimately related. We are motivated by our empirical findings that human capital is occupationspecific and that the fraction of workers switching occupations in the United States was as high as 16% a year in the early 1970s and had increased to 19% by the early 1990s. We develop a general equilibrium model with occupationspecific human capital and heterogeneous experience levels within occupations. We argue that the increase in occupational mobility was due to the increase in the variability of productivity shocks to occupations. The model, calibrated to match the increase in occupational mobility, accounts for over 90% of the increase in wage inequality over the period. A distinguishing feature of the theory is that it accounts for changes in withingroup wage inequality and the increase in the variability of transitory earnings. 
Keywords:  Occupational Mobility, Wage Inequality, WithinGroup Inequality, Human Capital, Sectoral Reallocation 
JEL:  E20 E24 E25 J24 J31 J62 
Date:  2000–01–15 
URL:  http://d.repec.org/n?u=RePEc:pen:papers:04026&r=dge 
By:  Jesus FernandezVillaverde (Department of Economics, University of Pennsylvania); Juan F. RubioRamirez (Federal Reserve Bank of Atlanta); Manuel Santos (College of Business, Arizona State University) 
Abstract:  This paper studies the econometrics of computed dynamic models. Since these models generally lack a closedform solution, economists approximate the policy functions of the agents in the model with numerical methods. But this implies that, instead of the exact likelihood function, the researcher can evaluate only an approximated likelihood associated with the approximated policy function. What are the consequences for inference of the use of approximated likelihoods? First, we show that as the approximated policy function converges to the exact policy, the approximated likelihood also converges to the exact likelihood. Second, we prove that the approximated likelihood converges at the same rate as the approximated policy function. Third, we find that the error in the approximated likelihood gets compounded with the size of the sample. Fourth, we discuss convergence of Bayesian and classical estimates. We complete the paper with three applications to document the quantitative importance of our results. 
Keywords:  computed dynamic models, likelihood inference, asymptotic properties 
JEL:  C1 C5 E1 
Date:  2004–08–31 
URL:  http://d.repec.org/n?u=RePEc:pen:papers:04034&r=dge 
By:  Joe Haslag (Department of Economics, University of MissouriColumbia); Joydeep Bhattacharya (Iowa State University); Steven Russell (IUPUI) 
Abstract:  In this paper, we study the optimal steady state monetary policy in overlapping generations (OG) models. In contrast to economies populated by inÞnitelylived representative agents (ILRA), the Friedman Rule is frequently not the policy that maximizes the welfare of twoperiod lived consumers. Our principal goal is to understand why the Friedman Rule is suboptimal in OG economies. To this end, we construct a mechanism.speciÞcally, a monetary policy regime.that renders money useless in the sense of executing intergenerational transfers. Under this governmental regime, we show that the optimal monetary policy is the Friedman Rule. Our Þnding is robust to alternative rationales for valued Þat money; speciÞcally, whether money is held voluntarily or involuntarily. 
JEL:  E31 E51 E58 
Date:  2004–12–27 
URL:  http://d.repec.org/n?u=RePEc:umc:wpaper:0301&r=dge 
By:  Joe Haslag (Department of Economics, University of MissouriColumbia); Antoine Martin (Research Department, Federal Reserve Bank of Kansas City) 
Abstract:  Recent papers suggest that when intermediation is analyzed seriously, the Friedman rule does not maximize social welfare in overlapping generations model in which money is valued because of spatial separation and limited communication. These papers emphasize a tradeoff between productive efficiency and risk sharing. We show financial intermediation or a tradeoff between productive efficiency and risk sharing are neither necessary nor sufficient for that result. We give conditions under which the Friedman rule maximizes social welfare and show any feasible allocation such that money grows faster than the Friedman rule is Pareto dominated by a feasible allocation with the Friedman rule. The key to the results is the ability to make intergenerational transfers. 
JEL:  E31 E51 E58 
Date:  2004–12–27 
URL:  http://d.repec.org/n?u=RePEc:umc:wpaper:0306&r=dge 
By:  Joseph H. Haslag (Department of Economics, University of MissouriColumbia); Joydeep Bhattacharya; Antoine Martin 
Abstract:  We construct an economy populated with infinitelylived agents and show that the Friedman rule is suboptimal. We do that by showing that our economy and an overlapping generations model in which the Friedman rule is known to be suboptimal are homomorphic. We also discuss the importance of whether or not the economy has an initial date for this result. 
Keywords:  Friedman rule; monetary policy; overlapping generations; turnpike. 
JEL:  E31 E51 E58 
Date:  2004–12–21 
URL:  http://d.repec.org/n?u=RePEc:umc:wpaper:0415&r=dge 
By:  Joseph H. Haslag (Department of Economics, University of MissouriColumbia); Joydeep Bhattacharya; Antoine Martin; Rajesh Singh 
Abstract:  In this paper, we explore the connection between optimal monetary policy and heterogeneity among agents. We study a standard monetary economy with two types of agents in which the stationary distribution of money holdings is nondegenerate. Sans typespecific fiscal policy, we show that the zeronominalinterest rate policy (the Friedman rule) does not maximize typespecific welfare; it may not maximize aggregate social welfare either. Indeed, one or, more surprisingly, both types may benefit if the central bank deviates from the Friedman rule. Our results suggest a positive explanation for why central banks around the world do not implement the Friedman rule. 
Keywords:  Friedman rule, monetary policy, moneyintheutilityfunction 
JEL:  E31 E51 E58 
Date:  2004–12–21 
URL:  http://d.repec.org/n?u=RePEc:umc:wpaper:0421&r=dge 