nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒02‒06
four papers chosen by
Christian Zimmermann
University of Connecticut

  1. Optimal Response to a Demographic Shock By Juan C. Conesa; Carlos Garriga
  3. Economic Development under Alternative Trade Regimes By CASTRO, Rui
  4. An Interview with Thomas J. Sargent By George W. Evans; Seppo Honkapohja

  1. By: Juan C. Conesa; Carlos Garriga
    Abstract: We examine the optimal policy response to an exogenously given demographic shock. Such a shock affects negatively the financing of retirement pensions, and we use optimal fiscal policy in order to determine the optimal strategy of the social security administration. Our approach provides specific policy responses in an environment that guarantees the financial sustainability of existing retirement pensions. At the same time, pensions will be financed in a way that by construction generates no welfare losses for any of the cohorts in our economy. In contrast to existing literature we endogenously determine optimal policies rather than exploring implications of exogenously given policies. Our results show that the optimal strategy is based in the following ingredients: elimination of compulsory retirement, a change in the structure of labor income taxation and a temporary increase in the level of government debt.
    JEL: E60 H00
    Date: 2005
  2. By: Vicenzo Quadrini; Claudio Michelacci (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We analyze how the financial conditions of the firm affect the compensation structure of workers, the size of the firm, and its dynamics. Firms that are financially constrained offer long-term wage contracts characterized by an increasing wage profile, that is,they pay lower wages today in exchange of higher future wages, effectively borrowing form their employees. Because constrained firms also operate at a suboptimal scale, which then increases gradually over time, we have that younger and smaller firms grow faster and pay lower wages.
    Keywords: Investment financing, long-term contracts, wages.
    JEL: G31 J31 E24
    Date: 2005–01
  3. By: CASTRO, Rui
    Abstract: How does openness affect economic development? This question is answered in the context of a dynamic general equilibrium model of the world economy, where countries have technological differences that are both sector-neutral and specific to the investment goods sector. Relative to a benchmark case of trade in credit markets only, consider (i) a complete restriction of trade, and (ii) a full liberalization of trade. The first change decreases the cross-sectional dispersion of incomes only slightly, and produces a relatively small welfare loss. The second change, instead, decreases dispersion by a significant amount, and produces a very large welfare gain.
    Keywords: Economic Develoent, International Trade, Investment-Scific Technology, Quantitative Dynamic General Equilibrium, Incomete Markets.
    JEL: E13 F43 O11 O30
    Date: 2005
  4. By: George W. Evans (University of Oregon Economics Department); Seppo Honkapohja (University of Cambridge)
    Abstract: This is the text of an interview with Thomas J. Sargent. The interview will be published in Macroeconomic Dynamics.
    Keywords: rational expectations
    JEL: E00
    Date: 2005–01–11

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