nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒04‒09
four papers chosen by
Christian Zimmermann
University of Connecticut

  1. Public Education and Capital Accumulation By Michele Boldrin
  2. A,B,C's (and D's)'s for Understanding VARS By Jesús Fernández-Villaverde; Juan F. Rubio-Ramirez; Thomas J. Sargent
  4. Deflation and the International Great Depression: A Productivity Puzzle By Harold L. Cole; Lee E. Ohanian; Ron Leung

  1. By: Michele Boldrin
    Date: 2005–04–05
  2. By: Jesús Fernández-Villaverde; Juan F. Rubio-Ramirez; Thomas J. Sargent
    Date: 2005–04–05
  3. By: Miquel Faig; Belen Jerez
    Abstract: Inflation, as a tax on money, induces buyers to reduce their money balances. Sellers are aware of this, so to attract costumers, they post price offers that reduce the need for buyers to carry precautionary money balances. We study this effect of inflation in a competitive search environment where buyers experience preference shocks after they are matched with a seller. With full information, equilibrium price offers consist of a flat fee which is independent of the quantities purchased. With private information of buyers' preferences, equilibrium price offers are restricted by incentive compatibility constraints. As a result, the price schedule that maps quantities purchased onto payments must be increasing. As inflation rises, these price schedules become relatively flat, so the marginal cost of purchasing goods is low. Consequently, buyers that are not liquidity constrained (with a low desire to consume) purchase inefficiently large quantities. Meanwhile, buyers with a high desire to consume typically purchase inefficiently low quantities because, as their money balances fall, they become liquidity constrained. This is in contrast with the full information benchmark where inflation reduces the quantities purchased by all buyers.
    Date: 2005–04
  4. By: Harold L. Cole; Lee E. Ohanian; Ron Leung
    Abstract: This paper presents a dynamic, stochastic general equilibrium study of the causes of the international Great Depression. We use a fully articulated model to assess the relative contributions of deflation/monetary shocks, which are the most commonly cited shocks for the Depression, and productivity shocks. We find that productivity is the dominant shock, accounting for about 2/3 of the Depression, with the monetary shock accounting for about 1/3. The main reason deflation doesn't account for more of the Depression is because there is no systematic relationship between deflation and output during this period. Our finding that a persistent productivity shock is the key factor stands in contrast to the conventional view that a continuing sequence of unexpected deflation shocks was the major cause of the Depression. We also explore what factors might be causing the productivity shocks. We find some evidence that they are largely related to industrial activity, rather than agricultural activity, and that they are correlated with real exchange rates and non-deflationary shocks to the financial sector.
    JEL: E0 N1
    Date: 2005–04

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