New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒03‒20
thirteen papers chosen by

  1. Self-Enforcing Labour Contracts and the Dynamics Puzzle By Christian Calmès
  2. Inflation in open economies with complete markets By Marco Celentani; J. Ignacio Conde-Ruiz; Klaus Desmet
  3. Endogenous Growth, Capital Utilization and Depreciation By J. Aznar-Márquez; J. R. Ruiz-Tamarit
  4. Cross-skill Redistribution and the Tradeoff between Unemployment Benefits and Employment Protection By Tito Boeri; J. Ignacio Conde-Ruiz; Vincenzo Galasso
  5. The Evolution of Retirement By J. Ignacio Conde-Ruiz; Vincenzo Galasso; Paola Profeta
  6. Time Consistency of Fiscal and Monetary Policy: A Solution By Persson , Mats; Persson , Torsten; Svensson, Lars E.O.
  7. Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through By Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Villani, Mattias
  8. Are Constant Interest Rate Forecasts Modest Interventions? Evidence from an Estimated Open Economy DSGE Model of the Euro Area By Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Villani, Mattias
  9. What Drives Business Cycles in a SmallOpen Economy with a Fixed Exchange Rate? By Niels Arne Dam; Jesper Gregers Linaa
  10. Uninsured Idiosyncratic Investment Risk and Aggregate Saving By George-Marios Angeletos
  11. Optimal Taxation with Endogenous Insurance Markets By Mikhail Golosov; Aleh Tsyvinski
  12. Financial Markets and the Real Economy By John Cochrane
  13. Social Change By Jeremy Greenwood; Nezih Guner

  1. By: Christian Calmès
    Abstract: To properly account for the dynamics of key macroeconomic variables, researchers incorporate various internal-propagation mechanisms in their models. In general, these mechanisms implicitly rely on the assumption of a perfect equality between the real wage and the marginal product of labour. The author proposes a theoretical validation of a micro-founded internal-propagation mechanism: he builds a model that features a limited-commitment economy, and derives endogenous self-enforcing labour contracts that produce a different linkage between the real wage and the marginal product of labour. The risk-sharing between the entrepreneur and the worker, both faced with enforcement problems, provides an admissible explanation of the prolonged comovements observed between consumption and labour. Since these co-movements are at the core of the persistence of the impulse response of output to exogenous technology shocks, this persistence can, in turn, be rationalized with the endogenous real rigidity emerging from the economy. The author shows that, in this framework, the persistence ultimately depends on the initial bargaining power and the magnitude of the risk-sharing.
    Keywords: Business fluctuations and cycles; Economic models; Labour markets
    JEL: E12 E49 J30 J31 J41
    Date: 2005
  2. By: Marco Celentani; J. Ignacio Conde-Ruiz; Klaus Desmet
    Abstract: This paper uses an overlapping generations model to analyze monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of a complete set of real securities. Each central bank is able to commit to the contingent monetary policy rule that maximizes domestic welfare. In an attempt to improve their country's terms of trade of securities, central banks may choose to commit to costly inflation in favorable states of nature. In equilibrium the effects on the terms of trade wash out, leaving both countries worse off. Countries facing asymmetric shocks may therefore gain from monetary cooperation.
  3. By: J. Aznar-Márquez; J. R. Ruiz-Tamarit
    Abstract: We study an extended version of the one-sector AK growth model introducing adjustment and maintenance costs. Agents are allowed to under-use the installed capital and to vary the depreciation rate. The model is analyzed using particular functional forms and is solved in closed-form. We find that adjustment and maintenance costs (e?- ciency) reduce (increases) investment, depreciation, capital utilization and the rate of growth; impatience reduces the rate of growth but increases depreciation and utilization, which are also negatively related to the rate of population growth; the rate of growth appears positively correlated with the depreciation rate and the rate of capital utilization.
  4. By: Tito Boeri; J. Ignacio Conde-Ruiz; Vincenzo Galasso
    Abstract: We document the presence of a trade-o. between unemployment benefits (UB) and employment protection legislation (EPL) in the provision of insurance against labor market risk. Di.erent countries’ locations along this trade-o. represent stable, hard to modify, politico-economic equilibria. We develop a model in which voters are required to cast a ballot over the strictness of EPL, the generosity of UBs and the amount of redistribution involved by the financing of unemployment Insurance. Agents are heterogeneous along two dimensions: employment status — insiders and outsiders — and skills — low and high. Unlike previous work on EPL, we model employment protection as an institution redistributing among insiders, notably in favour of the low-skill workers. A key implication of the model is that configurations with strict EPL and low UB should emerge in presence of compressed wage structures. Micro data on wage premia on educational attainments and on the strictness of EPL are in line with our results. We also find empirical support to the substantive assumptions of the model on the e.ects of EPL.
  5. By: J. Ignacio Conde-Ruiz; Vincenzo Galasso; Paola Profeta
    Abstract: We provide a long term perspective on the individual retirement behavior and on the future of early retirement. In a cross-country sample, we find that total pension spending depends positively on the degree of early retirement and on the share of elderly in the population, which increase the proportion of retirees, but has hardly any effect on the per-capita pension benefits. We show that in a Markovian political economic theoretical framework, in which incentives to retire early are embedded, a political equilibrium is characterized by an increasing sequence of social security contribution rates converging to a steady state and early retirement. Comparative statics suggest that aging and productivity slow-downs lead to higher taxes and more early retirement. However, when income effects are factored in, the model suggests that periods of stagnation - characterized by decreasing labor income - may lead middle aged individuals to postpone retirement
  6. By: Persson , Mats (Institute for International Economic Studies, Stockholm University); Persson , Torsten (Institute for International Economic Studies, Stockholm University); Svensson, Lars E.O. (Department of Economics, Princeton University)
    Abstract: This paper demonstrates how time consistency of the Ramsey policy–the optimal fiscal and monetary policy under commitment–can be achieved. Each government should leave its successor with a unique maturity structure for the nominal and indexed debt, such that the marginal benefit of a surprise inflation exactly balances the marginal cost. Unlike in earlier papers on the topic, the result holds for quite a general Ramsey policy, including time varying polices with positive inflation and positive nominal interest rates. We compare our results with those in Persson, Persson, and Svensson (1987), Calvo and Obstfeld (1990), and Alvarez, Kehoe, and Neumeyer (2004).
    Keywords: time consistency; Ramsey policy; surprise inflation
    JEL: E31 E52 H21
    Date: 2004–10–01
  7. By: Adolfson, Malin (Research Department, Central Bank of Sweden); Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Research Department, Central Bank of Sweden); Villani, Mattias (Research Department, Central Bank of Sweden)
    Abstract: In this paper we develop a dynamic stochastic general equilibrium (DSGE) model for an open economy, and estimate it on Euro area data using Bayesian estimation techniques. The model incorporates several open economy features, as well as a number of nominal and real frictions that have proven to be important for the empirical fit of closed economy models. The paper offers: i) a theoretical development of the standard DSGE model into an open economy setting, ii) Bayesian estimation of the model, including assesments of the relative importance of various shocks and frictions for explaining the dynamic development of an open economy, and iii) an evaluation of the model's empirical properties using standard validation methods.
    Keywords: DSGE model; Open economy; Monetary Policy; Bayesian Inference; Business cycle
    JEL: C11 E40 E47 E52
    Date: 2005–03–01
  8. By: Adolfson, Malin (Research Department, Central Bank of Sweden); Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Research Department, Central Bank of Sweden); Villani, Mattias (Research Department, Central Bank of Sweden)
    Abstract: This paper uses an estimated open economy DSGE model to examine if constant interest forecasts one and two years ahead can be regarded as modest policy interventions during the period 1993Q4-2002Q4. An intervention is here defined to be modest if it does not trigger the agents to revise their expectations about the inflation targeting policy. Using univariate modesty statistics, we show that the modesty of the policy interventions depends on the assumptions about the uncertainty in the future shock realizations. In 1998Q4-2002Q4, the two year constant interest rate projections turn out immodest when assuming uncertainty only about monetary policy shocks during the conditioning period. However, allowing non-policy shocks to influence the forecasts makes the interventions more modest, at least one year ahead. Using a multivariate statistic, however, which takes the joint effects of the policy interventions into consideration, we find that the conditional policy shifts all projections beyond what is plausible in the latter part of the sample (1998Q4-2002Q4), and thereby affects the expectations formation of the agents. Consequently, the constant interest rate assumption has arguably led to conditional forecasts at the two year horizon that cannot be considered economically meaningful during this period.
    Keywords: Forecasting; Monetary policy; Open economy DSGE model; Policy interventions; Bayesian inference
    JEL: C11 C53 E47 E52
    Date: 2005–03–01
  9. By: Niels Arne Dam (Institute of Economics, University of Copenhagen); Jesper Gregers Linaa (Institute of Economics, University of Copenhagen)
    Abstract: We decompose the Danish business cycle into ten structural shocks using an open-economy DSGE model with infrequent determination of prices and wages which we estimate with Bayesian techniques. Consistent with the Danish monetary policy regime, we formulate an imperfect peg on the foreign exchange rate and analyse the resulting monetary transmission mechanism. We find that the Danish business cycle is dominated by stochastic movements in the labour supply in the long term, while demand shocks play a major role in the short term. Remarkably, the role of technology is negligible, and foreign factors only contribute little to the Danish business cycle, especially in the long term. With respect to the estimation, we generally find believable estimates although the degree of price stickiness is remarkably high.
    Keywords: open economy, peg, business cycles, Bayesian estimation
    JEL: E3 E4 F4
    Date: 2005–03
  10. By: George-Marios Angeletos
    Abstract: This paper augments the neoclassical growth model to study the macroeconomic effects of idiosyncratic investment risk. The general equilibrium is solved in closed form under standard assumptions for preferences and technologies. A simple condition is identified for incomplete markets to result in both a lower interest rate and a lower capital stock in the steady state: the elasticity of intertemporal substitution must be higher than the income share of capital. For plausible calibrations of the model, the reduction in the steady-state levels of aggregate savings and income relative to complete markets is quantitatively significant. Finally, cyclical variation in private investment risks is shown to amplify the transitional dynamics.
    JEL: D52 E13 E32 G11
    Date: 2005–03
  11. By: Mikhail Golosov; Aleh Tsyvinski
    Abstract: We study optimal tax policy in a dynamic private information economy with endogenous private markets. We characterize efficient allocations and competitive equilibria. A standard assumption in the literature is that trades are observable by all agents. We show that in such an environment the competitive equilibrium is efficient. The only effect of government interventions is crowding out of private insurance. We then relax the assumption of observability of consumption and consider an environment with unobservable trades in competitive markets. We show that efficient allocations have the property that the marginal product of capital is different from the market interest rate associated with unobservable trades. In any competitive equilibrium without taxation, the marginal product of capital and the market interest rate are equated, so that competitive equilibria are not efficient. Taxation of capital income can be welfare-improving because such taxation introduces a wedge between market interest rates and the marginal product of capital and allows agents to obtain better insurance in private markets. Finally, we use plausibly calibrated numerical examples to compute optimal taxes and welfare gains and compare results to an economy with a restricted set of tax instruments, and to an economy with observable trades.
    JEL: E62 H21 H23 H53
    Date: 2005–03
  12. By: John Cochrane
    Abstract: I survey work on the intersection between macroeconomics and finance. The challenge is to find the right measure of marginal utility of wealth, or "bad times" so that we can understand average return premia distilled in finance "factors" as compensation for assets' tendency to pay off badly in "bad times." I survey the equity premium, consumption-based models, general equilibrium models, and labor income/idiosyncratic risk approaches to this question.
    JEL: G1 E3
    Date: 2005–03
  13. By: Jeremy Greenwood (University of Rochester); Nezih Guner (Pennsylvania State University)
    Abstract: Social norms are influenced by the technological environment that a society faces. Behavioral modes reflect purposive decision making by individuals, given the environment they live in. Thus, as technology changes, so might social norms. There were big changes in social norms during the 20th century, especially in sexual mores. In 1900 only six percent of unwed women engaged in premarital sex. Now, three quarters do. It is argued here that this was the result of technological improvement in contraceptives, which lowered the cost of premarital sex. The evolution from an abstinent to a promiscuous society is studied using an equilibrium matching model.
    Keywords: Social change; the sexual revolution; technological progress in contraceptives; bilateral search.
    JEL: E1 J1 O3
    Date: 2005–03

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