nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒04‒24
seven papers chosen by
Christian Zimmermann
University of Connecticut

  1. On the consumption-real exchange rate anomaly By Gianluca Benigno; Christoph Thoenissen
  2. Non-Constant Discounting in Continuous Time By Larry Karp
  3. Is Inequality Harmful for the Environment in a Growing Economy? By Hubert Kempf; Stéphane Rossignol
  4. Two-Sided Search, Heterogeneous Skills and Labor Market Performance By Samuel Danthine
  5. Firm Size Dynamics in the Aggregate Economy By Esteban Rossi-Hansberg; Mark L.J. Wright
  6. Urban Structure and Growth By Esteban Rossi-Hansberg; Mark L.J. Wright
  7. Cantor Type Attractors in Stochastic Growth Models. By Mitra, Tapan; Privileggi, Fabio

  1. By: Gianluca Benigno; Christoph Thoenissen
    Abstract: This paper addresses the consumption-real exchange rate anomaly. International real business cycle models based on complete financial markets predict a unitary correlation between the real exchange rate and the ratio of home to foreign consumption when subjected to supply-side shocks. In the data, this correlation is usually small and often negative. This paper shows that this anomaly can be successfully addressed by models that have an incomplete financial market structure and a non-traded as well as traded goods production sector.
  2. By: Larry Karp (University of California, Berkeley and Giannini Foundation)
    Abstract: This note derives the dynamic programming equation (DPE) to a differentiable Markov Perfect equilibrium in a problem with non-constant discounting and general functional forms. We begin with a discrete stage model and take the limit as the length of the stage goes to 0 to obtain the DPE corresponding to the continuous time problem. We characterize the multiplicity of equilibria under non-constant discounting and discuss the relation between a given equilibrium of that model and the unique equilibrium of a related problem with constant discounting. We calculate the bounds of the set of candidate steady states and we Pareto rank the equilibria.
    Keywords: hyperbolic discounting, time consistency, Markov equilibria, non-uniqueness, observational equivalence, Pareto efficiency,
    Date: 2004–01–05
  3. By: Hubert Kempf (Université Paris-1 Panthéon Sorbonne); Stéphane Rossignol (Université de Versailles, and EUREQua Université Paris-1 Panthéon-Sorbonne)
    Abstract: In this paper we investigate the relationship between inequality and the environment in a growing economy from a political economy perspective. We consider an endogenous growth economy, where growth generates pollution and a deterioration of the environment. Public expenditures may either be devoted to supporting growth or abating pollution. The decision over the public programs is done in a direct democracy, with simple majority rule. We prove that the median voter is decisive and show that inequality is harmful for the environment: the poorer the median voter relative to the average individual, the less she will tax and devote resources to the environment, preferring to support growth.
    Keywords: Inequality, Environment, Pollution abatement policy, Growth, Political economy
    JEL: D31 O11 Q50 Q58
    Date: 2005–01
  4. By: Samuel Danthine (Université du Québec à Montréal, CIRPÉE and IZA Bonn)
    Abstract: entrepreneurial skills is proposed. It is possible to characterize both the competitive equilibrium and the optimal solution numerically. The competitive equilibrium is shown to be suboptimal. Less-skilled workers and firms are too selective, not matching with their comparable counterparts. High-types, on the other hand, are not selective enough. The model shows promise as a tool for evaluating the effects of labor policies (and other changes in the economy) on the composition of unemployment and on unemployment duration, as well as on wage distributions. The effect of introducing a simple unemployment insurance scheme is then twofold. First, it increases unemployment by allowing a greater proportion of low types not to match, which decreases output. Second, it decreases mismatch, which has a positive effect on output. It is possible to have a positive effect of unemployment insurance on productivity and find the optimal level of unemployment insurance. Finally, it is shown that assuming risk-neutral workers in this model is not innocuous.
    Keywords: two-sided search, heterogeneity, unemployment, unemployment insurance, risk aversion
    JEL: J63 J65 J31
    Date: 2005–04
  5. By: Esteban Rossi-Hansberg; Mark L.J. Wright
    Abstract: Why do firm growth and exit rates decline with size? What determines the size distribution of firms? This paper presents a theory of firm dynamics that simultaneously rationalizes the basic facts on firm growth, exit, and size distributions. The theory emphasizes the accumulation of industry specific human capital in response to industry specific productivity shocks. The theory implies that firm growth and exit rates should decline faster with size, and the size distribution should have thinner tails, in sectors that use human capital less intensively, or correspondingly, physical capital more intensively. In line with the theory, we document substantial sectoral heterogeneity in US firm dynamics and firm size distributions, which is well explained by variation in physical capital intensities.
    JEL: E2 D2 L2
    Date: 2005–04
  6. By: Esteban Rossi-Hansberg; Mark L.J. Wright
    Abstract: Most economic activity occurs in cities. This creates a tension between local increasing returns, implied by the existence of cities, and aggregate constant returns, implied by balanced growth. To address this tension, we develop a theory of economic growth in an urban environment. We show that the urban structure is the margin that eliminates local increasing returns to yield constant returns to scale in the aggregate, which is sufficient to deliver balanced growth. In a multi-sector economy with specific factors and productivity shocks, the same mechanism leads to a city size distribution that is well described by a power distribution with coefficient one: Zipf's Law. Under certain assumptions our theory produces Zipf's Law exactly. More generally, it produces the systematic deviations from Zipf's Law observed in the data, including the under-representation of small cities and the absence of very large ones. In general, the model identifies the standard deviation of industry productivity shocks as the key parameter determining dispersion in the city size distribution. We present evidence that the relationship between the dispersion of city sizes and the variance of productivity shocks is consistent with the data.
    JEL: E0 O4 R0
    Date: 2005–04
  7. By: Mitra, Tapan; Privileggi, Fabio
    Abstract: We study a one-sector stochastic optimal growth model where production is affected by a shock taking one of two values. Such exogenous shock may enter multiplicatively or additively. A result is presented which provides sufficient conditions to ensure that the attractor of the iterated function system (IFS) representing the optimal policy, is a generalized topological Cantor set. To indicate the role of the strict monotonicity condition on the IFS in this result, examples of attractors, which are not of the Cantor type, are constructed with iterated function systems, whose maps are contractions and satisfy a no overlap property.
    JEL: C61 O41
    Date: 2005–02

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