nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒01‒16
seven papers chosen by
Christian Zimmermann
University of Connecticut

  1. Macroeconomic Effects of Social Security Privatization in a Small Unionized Economy By Antonis Adam
  2. Another Look at Modelling Leisure in the Utility Function: an application in RBC theory By Galindev Ragchaasuren
  3. The Relationship between Growth and Volatility under Alternative Shocks By Galindev Ragchaasuren
  4. Schooling and Business Cycle Persistence By Galindev Ragchaasuren
  5. Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints (Revised Version) By Ortalo-Magne, Francois; Rady, Sven
  6. Optimal Taxation in an RBC Model: A Linear-Quadratic Approach By Pierpaolo Benigno; Michael Woodford
  7. Are technology shocks responsible for the business cycle ? By Dufourt

  1. By: Antonis Adam
    Abstract: This paper analyses the effects of a pension system privatization in a unionized economy. Using an overlapping-generations framework we show that in an environment characterized by unemployment, a reform towards a private pension system in the steady state may result in lower levels of employment and capital stock. In this case even if the privatization increases the welfare of all future generations, the reduction in the welfare of the elderly due to reduced pension benefits may be greater and a Pareto improving transition to a private system may not be feasible. On the other hand if the reform leads to higher employment then a Pareto-improving pension privatization scheme can be constructed.
    Keywords: public pensions, social security privatization, labour union, unemployment
    JEL: H55 J32 J51
    Date: 2004
  2. By: Galindev Ragchaasuren
    Abstract: Do we specify leisure in the utility function correctly? The paper argues that the current method of specifying leisure in the utility function may be inappropriate as it implicitly assumes that leisure is a passive activity. Rather, utility should depend on leisure through the consumption of leisure related activities. In that sense, technological changes in these production sectors could alter the demand for leisure. I apply this argument in a simple RBC model in which there are two production sectors – a leisure-unrelated consumption good and a leisure-related good – and analyse the correlation between productivity and employment. The results are empirically consistent which implies that the correlation between these two variables suggested by standard RBC models could be significantly reduced, and in some cases it may be either negative or zero. The argument may open a new research avenue at both empirical and theoretical levels.
    Date: 2005–01–13
  3. By: Galindev Ragchaasuren
    Abstract: This paper presents a simple stochastic endogenous growth model with multiple shocks – a preference shock and a learning shock. The model is used to predict alternative relationships between growth and volatility on the basis of the underlying impulse source of fluctuations.
    Date: 2005–01–13
  4. By: Galindev Ragchaasuren
    Abstract: This paper presents a stochastic overlapping-generations model in which human capital accumulation is a result of deliberate schooling. The model is used to show how the opportunity cost of schooling measured by foregone wage can propagate shocks within a period and overtime.
    Date: 2005–01–13
  5. By: Ortalo-Magne, Francois; Rady, Sven
    Abstract: We propose a life-cycle model of the housing market with a property ladder and a credit constraint. We focus on equilibria which replicate the facts that credit constraints delay some households' first home purchase and force other households to buy a home smaller than they would like. The model helps us identify a powerful driver of the housing market: the ability of young households to afford the down payment on a starter home, and in particular their income. The model also highlights a channel whereby changes in income may yield housing price overshooting, with prices of trade-up homes displaying the most volatility, and a positive correlation between housing prices and transactions. This channel relies on the capital gains or losses on starter homes incurred by credit-constrained owners. We provide empirical support for our arguments with evidence from both the U.K. and the U.S.
    JEL: R21 G21 G12 E32
    Date: 2005–01
  6. By: Pierpaolo Benigno; Michael Woodford
    Abstract: We reconsider the optimal taxation of income from labor and capital in the stochastic growth model analyzed by Chari et al. (1994, 1995), but using a linear-quadratic (LQ) approximation to derive a log-linear approximation to the optimal policy rules. The example illustrates how inaccurate "naive" LQ approximation --- in which the quadratic objective is obtained from a simple Taylor expansion of the utility function of the representative household --- can be, but also shows how a correct LQ approximation can be obtained, which will provide a correct local approximation to the optimal policy rules in the case of small enough shocks. We also consider the numerical accuracy of the LQ approximation in the case of shocks of the size assumed in the calibration of Chari et al. We find that the correct LQ approximation yields results that are quite accurate, and similar in most respects to the results obtained by Chari et al. using a more computationally intensive numerical method.
    JEL: C63 H21
    Date: 2005–01
  7. By: Dufourt (BETA - University Louis Pasteur - Strasbourg I)
    Abstract: I use the restrictions implied by standard stochastic growth models to investigate whether technology shocks played a major role in the US business cycle. Business cycles are defined as fluctuations around an exogenously evolving productivity trend, identified through appropriate restrictions. My main findings can be summarized as follows: Business cycles implied by technology/supply shocks are mildly correlated to overall fluctuations, and help account for a few episodes of US postwar recessions. However, typically less than 20% of US fluctuations can be explained by these shocks. Most fluctuations seem instead to be due to 'nominal demand' shocks, ie. shocks which move output and prices in the same direction, but whose effects on output are ultimately transitory. In accordance with a recent, growing literature, our empirical results therefore cast new doubts on the view that technology shocks are a predominant source of economic fluctuations.
    Keywords: Business cycles, technological shocks, demand shocks
    JEL: E32 C32 C52
    Date: 2005–01–08

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