nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒05‒07
nine papers chosen by
Christian Zimmermann
University of Connecticut

  1. Welfare-Maximizing Operational Monetary and Tax Policy Rules By Kollmann, Robert
  2. The Welfare Cost of Business Cycles in an Economy with Non-Clearing Markets By Portier, Franck; Puch, Luis
  3. Fiat Money and the Natural Scale of Government By Martin Shubik; Eric Smith
  4. Commodity Money and the Valuation of Trade By Eric Smith; Martin Shubik
  5. Labor Supply and Saving under Uncertainty By Floden, Martin
  6. Wage Differentials, Discrimination and Efficiency By Shouyong Shi
  7. The Variability of Velocity of Money in a Search Model By Weimin Wang; Shouyong Shi
  8. Money, Price Dispersion and Welfare By Brian Peterson; Shouyong Shi
  9. Housing Debt, Employment Risk and Consumption By Viola Angelini; Peter Simmons

  1. By: Kollmann, Robert
    Abstract: This Paper computes welfare-maximizing monetary and tax policy feedback rules, in a calibrated dynamic general equilibrium model with sticky prices. The government makes exogenous final good purchases, levies a proportional income tax, and issues nominal one-period bonds. A quadratic approximation method is used to solve the model, and to compute household welfare. Optimized policy has a strong anti-inflation stance and implies persistent fluctuations of the tax rate and of public debt. Very simple optimized policy rules, under which the interest rate just responds to inflation and the tax rate just responds to public debt, yield a welfare level very close to that generated by richer rules.
    Keywords: fiscal policy; monetary policy; welfare
    JEL: E50 E60 H60
    Date: 2004–12
  2. By: Portier, Franck; Puch, Luis
    Abstract: In this Paper we measure the welfare cost of fluctuations in a simple representative agent economy with non-clearing markets. The market friction we consider involves price rigidities and a voluntary exchange-rationing scheme. These features are incorporated into an otherwise standard neoclassical growth model. We show that the frictions we introduce make the losses from fluctuations much bigger than in a frictionless environment.
    Keywords: cost of business cycles; dynamic general equilibrium; non-clearing markets
    JEL: C63 C68 E32
    Date: 2004–12
  3. By: Martin Shubik (Cowles Foundation, Yale University); Eric Smith (Sante Fe Institute)
    Abstract: The competitive market structure of a decentralized economy is converted into a self-policing system treating the bureaucracy and enforcement of the legal system endogenously. In particular we consider money systems as constructs to make agents' economic strategies predictable from knowledge of their preferences and endowments, and thus to support coordinated resource production and distribution from independent decision making. Diverse rule systems can accomplish this, and we construct minimal strategic market games representing government-issued fiat money and ideal commodity money as two cases. We endogenize the provision of money and rules for its use as productive activities within the society, and consider the problem of transition from generalist to specialist production of subsistence goods as one requiring economic coordination under the support of a money system to be solved. The scarce resource in a society is labor limited by its ability to coordinate (specifically, calling for the expenditure of time and effort on communication, computation, and control), which must be diverted from primary production either to maintain coordinated group activity, or to provide the institutional services supporting decentralized trade. Social optima are solutions in which the reduced costs of individual decision making against rules (relative to maintenance of coalitions) are larger than the costs of the institutions providing the rules, and in which the costs of the institutions are less than the gains from the trade they enable to take place.
    Keywords: Bureaucracy, Contract enforcement, Taxes, Money
    JEL: C7 D5 H5 K42
    Date: 2005–04
  4. By: Eric Smith (Sante Fe Institute); Martin Shubik (Cowles Foundation, Yale University)
    Abstract: In a previous essay we modeled the enforcement of contract, and through it the provision of money and markets, as a production function within the society, the scale of which is optimized endogenously by labor allocation away from primary production of goods. Government and a central bank provided fiat money and enforced repayment of loans, giving fiat a predictable value in trade, and also rationalizing the allocation of labor to government service, in return for a fiat salary. Here, for comparison, we consider the same trade problem without government or fiat money, using instead a durable good (gold) as a commodity money between the time it is produced and the time it is removed by manufacture to yield utilitarian services. We compare the monetary value of the two money systems themselves, by introducing a natural money-metric social welfare function. Because labor allocation both to production and potentially to government of the economy is endogenous, the only constraint in the society is its population, so that the natural money-metric is labor. Money systems, whether fiat or commodity, are valued in units of the labor that would produce an equivalent utility gain among competitive equilibria, if it were added to the primary production capacity of the society.
    Keywords: Bureaucracy, Contract enforcement, Taxes, Money
    JEL: C7 D5 H5 K42
    Date: 2005–04
  5. By: Floden, Martin (Dept. of Economic Statistics, Stockholm School of Economics)
    Abstract: This paper examines how variations in labor supply can be used to self-insure against wage uncertainty, and the impact of such self-insurance on precautionary saving. The analytical framework is a two-period model with saving and labor-supply decisions where preferences are consistent with balanced growth. The main findings are that (i) labor-supply flexibility raises precautionary saving when future wages are uncertain, and (ii) uncertainty about future wages raises current labor supply and reduces future labor supply.
    Keywords: precautionary saving; prudence; labor supply
    JEL: D81 E21
    Date: 2005–04–22
  6. By: Shouyong Shi
    Abstract: In this paper I construct a search model of a large labor market in which workers are heterogeneous in productivity and (homogeneous) firms post wages and a ranking of workers to direct workers' search. I establish the following results. First, the wage differential is negatively related to productivity when the productivity differential is small, while a positive relationship emerges when the productivity differential is large. Second, as the productivity differential decreases to zero, the reverse wage differential increases and so it remains strictly positive in the limit. Third, high-productivity workers are not discriminated against even when they have a lower wage, because they always have a higher priority in employment and higher expected wage than low-productivity workers. Fourth, the equilibrium is socially efficient, and so the wage differential and the ranking are part of the efficient mechanism. Finally, I provide numerical examples to illustrate the wage distribution.
    Keywords: Search; Wage Differential; Discrimination
    JEL: J3 J6 J7
  7. By: Weimin Wang; Shouyong Shi
    Abstract: We construct a dynamic equilibrium model where there is costly search in the goods market and the labor market. Incorporating shocks to money growth and productivity, we calibrate the model to the US time series data to examine the model's quantitative predictions on aggregate variables and, in particular, on the variability of consumption velocity of money. Despite the fact that money is the only asset, the model captures most of the variability of velocity in the data. It also generates realistic predictions on the moments of other variables and provides peresistent propagation of the shocks. The model generates these results largely because costly search gives an important role to the extensive margin of trade.
    JEL: E40 E30 D83
  8. By: Brian Peterson; Shouyong Shi
    Abstract: We introduce heterogeneous preferences into a tractable model of monetary search to generate price dispersion, and then examine the effects of money growth on price dispersion and welfare. With buyers' search intensity fixed, we find that money growth increases the range of (real) prices and lowers welfare as agents shift more of their consumption to less desirable goods. When buyers' search intensity is endogenous, multiple equilibria are possible. In the equilibrium with the highest welfare level, money growth reduces welfare and increases the range of prices, while having ambiguous effects on search intensity. However, there can be a welfare-inferior equilibrium in which an increase in money growth increases search intensity, increases welfare, and reduces the range of prices.
    Keywords: Price dispersion; Search; Efficiency
    JEL: E31 D60
  9. By: Viola Angelini; Peter Simmons
    Abstract: We consider the interaction between the risk of unemployment, random house prices, consumption and savings. A critical decision is that of refinancing house purchase, up to 100% mortgages are possible. There is also a fixed transaction cost of refinancing. In a CARA framework we derive the value function for a finite horizon, the policy of refinance and the consumption function. Either there is a maximum mortgage or a zero mortgage depending on interest rates, house prices and the transaction cost. The consumption function is linear in wealth and in the uncertainty caused by employment status and house prices of the future. Since there is either 100% or 0% equity withdrawal, consumption jumps when there is refinancing.
    Keywords: Precautionary savings; employment risk; mortgages; housing
    JEL: D11 D14 E21

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