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on Dynamic General Equilibrium |
| By: | Espen Henriksen; Stephen Spear |
| Abstract: | The question we ask is: within the set of a three-period-lived OLG economies with a stochastic endowment process, a stochastic dividend process, and sequentially complete markets, under what set of conditions may a set of government transfers dynamically Pareto dominate the laissez faire equilibrium? We start by characterizing perfect risk sharing and find that it implies a strongly stationary set of state-dependent consumption claims. We also derive the stochastic equivalent of the deterministic steady-state by steady-state optimal marginal rate of substitution. We show then that the risk sharing of the recursive competitive laissez faire equilibrium of any overlapping generations economy with weakly more than three generations is non-stationary and that risk is suboptimally shared. We then show that we can construct a sequence of consumption allocations that only depends on the exogenous state and which Pareto dominate the laissez faire allocations in an ex interim as well as ex ante sense. We also redefine conditional Pareto optimality to apply within this framework and show that under a broad set of conditions, there also exists a sequence of allocations that dominates the laissez faire equilibrium in this sense. Finally, we apply these tools and results to an economy where the endowment is constant, but where fertility is stochastic, i.e. the number of newborn individuals who enters the economy follows a Markov Process. |
| URL: | http://d.repec.org/n?u=RePEc:cmu:gsiawp:1114116336&r=dge |
| By: | Franz Hamann; Juan Manuel Julio; Paulina Restrepo; Alvaro Jose Riascos Villegas |
| Abstract: | This paper presents a dynamic stochastic general equilibrium model of inflation targeting in small open economy. We calibrate the model to the Colombian economy and present the response of some macroeconomic variables to different types of shocks that are relevant for emerging economies. We also analyze the sensitivity of those responses to some key parameters. Furthermore, using simulated data from the model we study the ability of the model to capture the spectra, the phase and the coherence of observed output and inflation. We follow a frequency domain comparison methodology proposed by Diebold, Ohanian and Berkowitz (1998,[19]). The Colombian data is characterized by: first, cyclical inflation and output gap (as measured by Hodrick – Prescott filter) are dominated by periodic movements between 2 and 25 quarters with a peak between 10 and 12 quarters. The cross spectrum and coherence show results in the the same direction. Second, the coherence does not show any significant dominance of frequencies for the cross movements but the correlation jumps to 0,6 for periodic movements around 5 quarters. These facts are compared to the data simulated from the model. We conclude that the simulated data spectra and cross spectra do not differ statistically from the respective population quantities for, at least, frequencies beyond 0,05 . Which correspond to periodic movements of up to at least 10 quarters. The model spectra presents more persistence than the observed data the population coherence is captured for most frequencies but the ones around the peack of the model's theoretical coherence and very long run periodic movements. Subsequent research will address these issues. |
| Date: | 2004–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:col:000070:000711&r=dge |
| By: | Paulina Restrepo Echavarría |
| Abstract: | Since 1991, inflation in Colombia was reduced from 25% on average to about 6% more recently. Although this performance is in line with a long run inflation target of 3%, some analysts ask whether the Central Bank should continue ting. In this paper we present a dynamic stochastic general equilibrium model of inflation targeting for a small open economy to answer this question. We calibrate the model to the Colombian economy and compute the welfare cots and benefits of achieving the long run inflation target. We find that the long run welfare gains are about 4.54% in terms of capital. Furthermore,accounting for the transition the welfare gains are about 1.18% in terms of capital. Our results differ from previous findings because transition costs are introduced and our environment considers the presence of real rigidities (monopolistic competition) and nominal rigidities (sticky information) in a small open economy.We also analyze the sensitivity of the results to some key parameters and conclude that higher price flexibility leads to lower gains from reducing inflation and that a country with markups around 15% receives higher gains than those countries with different levels of markups. The weight given to the inflation gap in the monetary policy rule is important, as a more aggressive Central Bank can improve welfare. Finally,we find that disinflation is more expensive in the case of a closed economy. |
| Keywords: | Small Open Economy; |
| JEL: | E31 |
| Date: | 2005–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:col:000070:000952&r=dge |
| By: | Oscar Mauricio VALENCIA ARANA |
| Abstract: | This paper presents an analysis of the relationship between economic growth and income tax evasion. For this purpose we constructed a dynamic model with human capital in which income tax evasion is endogenous. The model captures the effects of income tax evasion on economic growth through three channels: 1) Income tax evasion alters the optimal path of consumption and savings 2) income tax evasion generates labor market distortions; 3) returns on assets are affected when tax evasion occurs. The concept of optimal policy against evasion is introduced. Based on the Ramsey policy approach, the income tax evasion is reformulated as particular case of endogenous incompleteness tax code. In this case, we found that the optimal income tax rate in the steady-state is different to zero. The model was calibrated for the 2000 Colombian economy. Counterfactual experiments show that different enforcement policies based on an increased probability of detection and punishment have a positive impact on welfare and growth. On the other hand, as income tax evasion increases so the capital cost goes up, the labor supply is reduced and economic growth and welfare decreases. |
| Keywords: | Income Tax Evasion |
| Date: | 2004–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:col:000107:000874&r=dge |
| By: | ALVARO RIASCOS; LUIS FERNANDO MELO VELANDIA |
| Abstract: | En este documento estudiamos algunos canales, mecanismos de ampli- ficación y los efectos cuantitativos de la política monetaria en Colombia. Adicionalmente, sugerimos una metodología completa, consistente teóricamente con la teoría del Equilibrio General y práctica para el análisis de política y pronósticos de variables económicas de interés. |
| Keywords: | MONETARY POLICY, |
| Date: | 2004–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:col:000140:000945&r=dge |
| By: | Debajyoti Chakrabarty (University of Sydney); Areendam Chanda (Louisiana State University); Chetan Ghate (Indian Statistical Institute, New Delhi) |
| Abstract: | We study the effect of capital controls on the level of investment in human capital and the resulting growth path of an economy. The economy consists of two groups of agents based on the ownership of factors of production. One type of agents - called workers - own human capital and bequeath education to their offsprings. The other group of agents - called capitalists - own and bequeath physical capital. The workers have the political power to tax capital income. The capitalists, based on the tax rate imposed by the workers and the capital control regime in place, decide to invest part or all of their capital abroad. We characterize the optimal tax behavior of the workers. We find that higher capital controls are beneficial for investment in education whenever there is capital flight in a steady state equilibrium. However, higher capital controls are shown to have no effect on the tax rate on capital income imposed by workers: rather, they act as a disincentive for capital flight by lowering the return from foreign investment. We show that lowering capital controls can lead to higher growth only when there is no capital flight in the steady state. Importantly, to prevent capital flight in the long run, human capital accumulation must not show decreasing returns with respect to education and the economy must be sufficiently developed. |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ind:isipdp:05-03&r=dge |
| By: | Bhattacharya, Joydeep; Singh, Rajesh |
| Abstract: | Poole (1970) using a stochastic IS-LM model presented the first formal treatment of the classic question: how should a monetary authority decide whether to use the money stock or the interest rate as the policy instrument? We update the seminal work of Poole in a microfounded flexible-price general equilibrium model of money using explicit welfare criteria. Specifically, we study the optimal choice of monetary policy instruments in a overlapping-generations economy where limited communication and stochastic relocation creates an endogenous transactions role for fiat money. We characterize stationary welfare maximizing monetary and inflation targets for settings in which the economy is separately hit with i.i.d endowment and liquidity shocks. Our analysis suggests that the central insight of Poole survives: when the shocks are real, welfare is higher under money growth targeting; when the shocks are nominal and not large, welfare is higher under inflation rate targeting. |
| JEL: | E0 |
| Date: | 2005–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:12355&r=dge |
| By: | Andreas Pollak (University of Freiburg) |
| Abstract: | The framework of a general equilibrium heterogeneous agent model is used to study the optimal design of an unemployment insurance (UI) scheme and the voting behaviour on unemployment policy reforms. In a first step, the optimal defined benefit and defined replacement ratio UI systems are obtained in simulations. Then, the question whether switching to such an optimal system from the status quo would be approved by a majority of the voters is explored. Finally, the transitional dynamics following a policy change are analysed. Accounting for this transition has an important influence on the voting outcome. |
| Keywords: | insurance, heterogeneous agents, job search, voting, human capital |
| JEL: | C61 D58 D78 E24 E61 J64 J65 |
| Date: | 2005–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpco:0505002&r=dge |
| By: | Roger Lagunoff (Georgetown University) |
| Abstract: | This paper studies dynamic, endogenous institutional change. We introduce the class of dynamic political games (DPGs), dynamic games in which future political aggregation rules are decided under current ones, and the resulting institutional choices do not affect payoffs or technology directly. A companion paper (Lagunoff (2005b)) establishes existence of Markov Perfect equilibria of dynamic political games. The present paper examines issues of stability and reform when such equilibria exist. Which environments tend toward institutional stability? Which tend toward reform? We show that when political rules are dynamically consistent and private sector decisions areinessential,reform never occurs: all political rules are stable. Roughly,private sector decisions are inessential if any feasible ``social' continuation payoff can achieved by public sector decisions alone. More generally, we identify sufficient conditions for stability and reform in terms of recursive self selection and recursive self denial,incentive compatibility concepts that treat the rules themselves as ``players' who can strategically delegate future policy-making authority to different institutional types. These ideas are illustrated in an example of dynamic public goods provision. |
| Keywords: | Recursive, dynamic political games, institutional reform, stability, dynamically consistent rules, inessential, recursive self selection. |
| JEL: | C73 D72 D74 |
| Date: | 2005–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpga:0505006&r=dge |
| By: | Günther Rehme (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)) |
| Abstract: | This paper analyzes the link between growth and public policy when the latter depends on economically important fundamentals. When policy is endogenous the measured effects of policy on growth will generally be biased. Using a widely quoted theoretical model, the signs of the biases are derived. It is shown that the usually reported effects on growth of tax rate variables related to GDP, the ratio of public investment to total investment and the ratio of redistributive transfers to GDP are generally biased downwards. Based on these signed biases the paper discusses some empirical results that seem puzzling from a theoretical viewpoint. |
| Keywords: | Growth, Public Policy, Cross-Sectional Models |
| JEL: | O4 C2 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:tud:ddpiec:140&r=dge |
| By: | Rafel Gerke (Ehemalig Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)); Jens Rubart (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)) |
| Abstract: | The question of the main determinants of persistent responses due to nominal shocks captures, at least since Chari et al. (2000), a major part of the recent macroeconomic debate. However, the question whether sticky wages and/or sticky prices are sufficient for persistent reactions of key economic variables remains open. In the present model we allow for nominal rigidities due to Taylor- like wage setting as well as price adjustment costs. However, as our analysis illustrates, smoothing marginal costs seems crucial to derive a contract multiplier, wage staggering alone is not sufficient. Without considering a more specific analysis of factor market frictions, we enforce a point made by Erceg (1997) by analyzing the structure of money demand. In particular, we analyze a `standard' consumption based money demand function by varying the interest rate elasticity of money demand as well as the steady state rate of money holdings. Our results show that the persistency of the output/price dynamics can be affected crucially by the form of the implicit money demand function. In particular, it is shown that staggered wage contracts have to be accompanied by a sufficiently low interest rate elasticity, otherwise the model fails to reproduce reasonable responses of real variables |
| Keywords: | Monetary Policy Shocks, Sticky Prices, Staggered Wages, Money Demand |
| JEL: | E32 E41 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:tud:ddpiec:142&r=dge |