nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒04‒03
five papers chosen by
Christian Zimmermann
University of Connecticut

  1. Capital Market Frictions, Business Cycle and Monetary Transmission By Olivier Pierrard
  2. Estimating the Stochastic Discount Factor without a Utility Function By Fabio Araujo; João Victor Issler; Marcelo Fernandes
  3. Aggregate Savings When Individual Income Varies By Floden, Martin
  4. An Adverse Selection Model of Optimal Unemployment Insurance By Marcus Hagedorn; Ashok Kaul; Tim Mennel
  5. Discovering the Sources of TFP Growth: Occupational Choice and Financial Deepening By Hyeok Jeong; Robert M. Townsend

  1. By: Olivier Pierrard
    Abstract: Empirical evidence shows that some firms may be capital constraintbecause of capital market imperfections. We therefore extend the business cycle models with frictions `a la Pissarides on the labour market by also introducing symmetric frictions on the capital market. We show that the capital market frictions (and their interactions with the labour market frictions) improve the statistical properties of the model and generate a financial accelerator.
    Keywords: capital market frictions; business cycle; monetary transmission
    JEL: E13 E24 E51
    Date: 2005–02
  2. By: Fabio Araujo; João Victor Issler (EPGE/FGV); Marcelo Fernandes (EPGE/FGV)
    Date: 2005–03
  3. By: Floden, Martin (Dept. of Economics, Stockholm School of Economics)
    Abstract: This paper examines aggregate savings in a general equilibrium model where infinitely lived households face volatile (and possibly uncertain) income paths, hold a risk-free asset, and face a liquidity constraint. I first show that the equilibrium capital stock in an economy without uncertainty, but where individual income varies, can be larger than in an economy where each household's income is constant. When income is stochastic, the equilibrium capital stock is always larger than when income is constant. This additional capital accumulation has sometimes been interpreted as precautionary savings, but I demonstrate that it is mostly generated by permanent-income motives.
    Keywords: equilibrium interest rate; aggregate savings; precautionary saving; infinite horizon; general equilibrium
    JEL: D52 D91 E21
    Date: 2005–03–23
  4. By: Marcus Hagedorn; Ashok Kaul; Tim Mennel
    Abstract: We ask whether offering a menu of unemployment insurance contracts is welfare improving in a heterogeneous population. We adopt a repeated moral-hazard framework as in Shavell/Weiss (1979) supplemented by unobserved heterogeneity about agents’ job opportunities. Our main theoretical contribution is an analytical characterization of the sets of jointly feasible entitlements that renders an efficient computation of these sets feasible. Our main economic result is that optimal contracts for ”bad” searchers tend to be upward-sloping due to an adverse-selection effect. This is in contrast to the well-known optimal decreasing time-profile of benefits in pure moral hazard environments that continue to be optimal for ”good” searchers in our model.
    Keywords: Unemployment Insurance, Recursive Contracts, Adverse Selection, Repeated Moral Hazard
    JEL: J65 J64 D82 C61 E61
  5. By: Hyeok Jeong; Robert M. Townsend
    Abstract: Total factor productivity (TFP) growth is measured as a residual and its sources typically remain unknown inside the residual. This paper aims to identify the underlying sources of this residual growth, being explicit about both micro underpinnings and transitional growth. The key forces are occupational choice and limited access to credit. We develop a method of growth accounting that decomposes not only the overall growth but also TFP growth into four components: occupational shifts, financial deepening, capital heterogeneity, and sectoral Solow residuals. Thus we explicitly evaluate the quantitative importance of micro impediments to trade such as credit constraint on aggregate growth dynamics, in particular the TFP dynamics. Applying this method to Thailand, which experienced rapid growth with enormous structural changes for the two decades between 1976 and 1996, we find that 73 percent of TFP growth can be explained on average by occupational shifts and financial deepening, without presuming exogenous technical progress. Expansion of credit is a major part of this explained TFP growth. The remainder TFP growth is related to the sectoral Solow residuals, which are determined by the endogenous interaction between the price dynamics of wage, interest rate, and profits and the evolution of wealth distribution. The nature of this interaction between price dynamics and wealth distribution depends on access to credit, and the di¤erences in measured TFP growth across subgroups di¤erentiated by any specific characteristics may reflect the varying degrees of limited access to credit rather than subgroup-specific technical changes. The above key forces of TFP also provide a micro foundation of the relationship between growth and inequality. The inequality among the non-intermediated a¤ects the growth of the intermediated. The growth of the intermediated trickles down to the non-intermediated and reduces inequality among them.
    Keywords: Total Factor Productivity, Occupation Choice, Financial Deepening
    JEL: O47 O16 J24 D24
    Date: 2005–03

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