nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒06‒14
thirty papers chosen by
Christian Zimmermann
University of Connecticut

  1. On the Identification of Monetary (and Other) Shocks By Martin Menner; Hugo Rodriguez Mendizabal
  2. Projection Methods for Economies with Heterogeneous Agents By Radim Bohacek; Michal Kejak
  3. Shooting the Auctioneer By Farmer, Roger E A
  4. The Effects of Permanent Technology Shocks on Labour Productivity and Hours in the RBC Model By Lindé, Jesper
  5. The Macroeconomics of Subsistence Points By Ravn, Morten O.; Schmitt-Grohé, Stephanie; Uribe, Martín
  6. Economic Fluctuations in Central and Eastern Europe: The Facts By Benczúr, Péter; Rátfai, Attila
  7. On the Fit and Forecasting Performance of New Keynesian Models By Del Negro, Marco; Schorfheide, Frank; Smets, Frank; Wouters, Rafael
  8. Firm-Specific Capital, Nominal Rigidities and the Business Cycle By Altig, David E; Christiano, Lawrence; Eichenbaum, Martin; Lindé, Jesper
  9. Financial Markets and Wages By Michelacci, Claudio; Quadrini, Vincenzo
  10. Indeterminacy and Unemployment Fluctuations with Constant Returns to Scale in Production By Dufourt, Frédéric; Lloyd-Braga, Teresa; Modesto, Leonor
  11. Experimental Evidence on the Persistence of Output and Inflation By Adam, Klaus
  12. Trends in Hours, Balanced Growth and the Role of Technology in the Business Cycle By Galí, Jordi
  13. Euler Equation Errors By Lettau, Martin; Ludvigson, Sydney
  14. Asset Pricing Implications of Pareto Optimality with Private Information By Kocherlakota, Narayana; Pistaferri, Luigi
  15. Time Consistency of Fiscal and Monetary Policy: A Solution By Persson, Torsten; Persson, Mats; Svensson, Lars E O
  16. Neoclassical Growth and the 'Trivial' Steady State By Hakenes, Hendrik; Irmen, Andreas
  17. The Impact of TFP Growth on Steady-State Unemployment By Pissarides, Christopher; Vallanti, Giovanna
  18. Explaining The Equity Risk Premium By Lungu, Laurian; Minford, Patrick
  19. The Replacement Problem in Frictional Economies: An 'Equivalence Result' By Hornstein, Andreas; Krusell, Per; Violante, Giovanni L
  20. Real Exchange Rate Overshooting RBC Style By Meenagh, David; Minford, Patrick; Nowell, Eric; Sofat, Prakriti
  21. Pareto Improving Social Security Reform when Financial Markets Are Incomplete By Krueger, Dirk; Kubler, Felix
  22. On the Optimal Progressivity of the Income Tax Code By Conesa, Juan Carlos; Krueger, Dirk
  23. Theory, measurement, and calibration of macroeconomic models By Paul Gomme; Peter Rupert
  24. Temporary partial expensing in a general-equilibrium model By Rochelle M. Edge; Jeremy B. Rudd
  25. Growing old together: firm survival and employee turnover By Erwan Quintin; John J. Stevens
  26. Who is afraid of the Friedman rule? By Joydeep Bhattacharya; Joseph Haslag; Antoine Martin; Rajesh Singh
  27. Consumer search, price dispersion, and international relative price volatility By George Alessandria
  28. Real Business Cycle Models: Past, Present, and Future By Sergio Rebelo
  29. Investment-Specific Technology Shocks in a Small Open Economy By Millan L. B. Mulraine
  30. MONEY AND BUSINESS CYCLE IN A SMALL OPEN ECONOMY By Eduardo L. Gimenez; Jose M. Martin-Moreno

  1. By: Martin Menner; Hugo Rodriguez Mendizabal
    Abstract: The purpose of this paper is twofold. First, we construct a DSGE model which spells out explicitly the instrumentation of monetary policy. The interest rate is determined every period depending on the supply and demand for reserves which in turn are affected by fundamental shocks: unforeseeable changes in cash withdrawal, autonomous factors, technology and government spending. Unexpected changes in the monetary conditions of the economy are interpreted as monetary shocks. We show that these monetary shocks have the usual effects on economic activity without the need of imposing additional frictions as limited participation in asset markets or sticky prices. Second, we show that this view of monetary policy may have important consequences for empirical research. In the model, the contemporaneous correlations between interest rates, prices and output are due to the simultaneous effect of all fundamental shocks. We provide an example where these contemporaneous correlations may be misinterpreted as a Taylor rule. In addition, we use the sign of the impact responses of all shocks on output, prices and interest rates derived from the model to identify the sources of shocks in the data.
    Keywords: Monetary Policy, Shocks, Identification, Taylor Rules
    JEL: E32 E52 E58
    Date: 2005–05–27
  2. By: Radim Bohacek; Michal Kejak
    Abstract: In this paper we develop a general methodology for solving models with heterogeneous agents by projection methods. Our approach is solely based on the functional forms of agents’ optimal policy rules and on a functional condition on the endogenous stationary distribution. Solving simultaneously the optimal policy rules and the distribution, this paper provides a new methodology for computing equilibria in which the distribution of wealth and income is a part of a social planner’s optimization problem. We do not impose any additional restrictions or assumptions on the equilibrium allocations. Compared to other computational methods, it does not suffer from the curse of dimensionality and provides an efficient tool for computing models of economies with a continuum of heterogeneous agents with several endogenous and exogenous state variables. We illustrate the algorithm on a standard model with uninsurable idiosyncratic risk from labor income. The approximate solution is highly accurate, especially for the distribution function. This method can be used to compute equilibria in economies with heterogeneous agents in which the distribution of wealth and income is a part of a government’s optimization problem.
    JEL: C61 C68 D30 D58
    Date: 2005–05
  3. By: Farmer, Roger E A
    Abstract: Most dynamic stochastic general equilibrium models (DSGE) of the macroeconomy assume that labour is traded in a spot market. Two exceptions (Andolfatto [3], Merz [11]) combine the two-sided search model of Mortenson and Pissarides, [14], [13], [15] with a one-sector real business cycle model. These hybrid models are successful, in some dimensions, but they cannot account for observed volatility in unemployment and vacancies. Following a suggestion by Hall, [4] [5], building on work by Shimer [18], this Paper shows that a relatively standard DSGE model with sticky wages can account for these facts. Using a second-order approximation to the policy function I simulate moments of an artificial economy with and without sticky wages. I compute the welfare costs of the sticky wage equilibrium and find them to be small.
    JEL: E24 E32 J63 J64
    Date: 2005–01
  4. By: Lindé, Jesper
    Abstract: Recent work on the effects of permanent technology shocks argue that the basic RBC model cannot account for a negative correlation between hours worked and labour productivity. In this Paper, I show that this conjecture is not necessarily correct. In the basic RBC model, I find that hours worked fall and labour productivity rises after a positive permanent technology shock once one allows for the possibility that the process for the permanent technology shock is persistent in growth rates. A more serious limitation of the RBC model is its inability to generate a persistent rise in hours worked after a positive permanent technology shock along with a rise in labour productivity that are in line with what the data suggests.
    Keywords: hours worked per capita; labour productivity; permanent technology shocks; real business cycle model; vector autoregressions
    JEL: E24 E32
    Date: 2005–01
  5. By: Ravn, Morten O.; Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: This paper explores the macroeconomic consequences of preferences displaying a subsistence point. It departs from the existing related literature by assuming that subsistence points are specific to each variety of goods rather than to the composite consumption good. We show that this simple feature makes the price elasticity of demand for individual goods procyclical. As a result, markups behave countercyclically in equilibrium. This implication is in line with the available empirical evidence.
    Keywords: business cycles; non-homothetic preferences; time-varying markups
    JEL: D10 D12 D42 E30
    Date: 2005–01
  6. By: Benczúr, Péter; Rátfai, Attila
    Abstract: We carry out a detailed analysis of quarterly frequency dynamics in macroeconomic aggregates in twelve countries of Central and Eastern Europe. The facts we document include the variability and persistence in and the co-movement among output, and other major real and nominal variables. We find that consumption is highly volatile and government spending is procyclical. Gross fixed capital formation is highly volatile. Net exports are countercyclical. Imports are procyclical, much more than exports. Exports are most procyclical and persistent in open countries. Labour market variables are all highly volatile. Employment is lagging, and often procyclical. Real wages are dominantly procyclical. Productivity is dominantly procyclical and coincidental. Private credit is procyclical and dominantly lagging the cycle. The CPI is countercyclical, and is weakly leading or coincidental. The cyclicality of inflation is unclear, but its relative volatility is low. Net capital flows are mostly leading and procyclical and exhibit low persistence. Nominal interest rates are in general smooth and persistent. The nominal exchange rate is more persistent than the real one. Overall, we find that fluctuations in CEE countries are larger than in industrial countries, and are of similar size than in other emerging economies. This is particularly true about private consumption. The co-movement of variables, however, shows a large degree of similarity. A notable exception is government spending: unlike in industrial economies, it is rather procyclical in transition economies. The findings also indicate that Croatia and the accession group show broadly similar cyclical behaviour to industrial countries. The most frequent country outliers are Bulgaria, Romania and Russia, especially in labour market, price and exchange rate variables. Excluding these countries from the sample makes many of the observed patterns in cyclical dynamics quite homogenous.
    Keywords: business cycle facts; Central and Eastern Europe
    JEL: E32
    Date: 2005–01
  7. By: Del Negro, Marco; Schorfheide, Frank; Smets, Frank; Wouters, Rafael
    Abstract: The Paper provides new tools for the evaluation of DSGE models, and applies it to a large-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model with price and wage stickiness and capital accumulation. Specifically, we approximate the DSGE model by a vector autoregression (VAR), and then systematically relax the implied cross-equation restrictions. Let delta denote the extent to which the restrictions are being relaxed. We document how the in- and out-of-sample fit of the resulting specification (DSGE-VAR) changes as a function of delta. Furthermore, we learn about the precise nature of the misspecification by comparing the DSGE model’s impulse responses to structural shocks with those of the best-fitting DSGE-VAR. We find that the degree of misspecification in large-scale DSGE models is no longer so large to prevent their use in day-to-day policy analysis, yet it is not small enough that it cannot be ignored.
    Keywords: Bayesian Analysis; DSGE models; model evaluation; vector autoregression
    JEL: C11 C32 C53
    Date: 2005–01
  8. By: Altig, David E; Christiano, Lawrence; Eichenbaum, Martin; Lindé, Jesper
    Abstract: Macroeconomic and microeconomic data paint conflicting pictures of price behaviour. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model that resolves this apparent micro/macro conflict. Our model is consistent with post-war US evidence on inflation inertia even though firms re-optimize prices on average once every 1.5 quarters. The key feature of our model is that capital is firm-specific and pre-determined within a period.
    JEL: E30 E40 E50
    Date: 2005–01
  9. By: Michelacci, Claudio; Quadrini, Vincenzo
    Abstract: We study a labour market equilibrium model in which firms sign optimal long-term contracts with workers. Firms that are financially constrained offer an increasing wage profile: they pay lower wages today in exchange of higher wages once they become unconstrained and operate at a larger scale. In equilibrium, constrained firms are on average smaller and pay lower wages. In this way the model generates a positive relation between firm size and wages. Using data from the National Longitudinal Survey of Youth (NLSY) we show that the key dynamic properties of the model are supported by the data.
    Keywords: investment financing; long-term contracts; wages
    JEL: E24 G31 J31
    Date: 2005–01
  10. By: Dufourt, Frédéric; Lloyd-Braga, Teresa; Modesto, Leonor
    Abstract: We extend the finance-constrained economy proposed by Woodford (1986) to incorporate imperfectly insured unemployment, by introducing unions and unemployment benefits financed by labour taxation. We show that this simple extension of the Woodford model changes drastically its stability conditions and local dynamics around the steady state. In fact, in contrast to related models in the literature, we find that under constant returns to scale in production: (i) indeterminacy always prevails in the case of a unitary elasticity of substitution between capital and labour; (ii) flip and Hopf bifurcations occur for empirically credible elasticities of substitution between capital and labour, so that a rich set of dynamics may emerge at ‘realistic’ parameters’ values.
    Keywords: bifurcations; endogenous fluctuations; imperfectly insured unemployment; indeterminacy
    JEL: E24 E32 E62
    Date: 2005–01
  11. By: Adam, Klaus
    Abstract: This paper presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation. With rational inflation expectations, the economy does not generate persistent deviations of output and inflation in response to a monetary shock. In the experimental sessions, however, output and inflation display considerable persistence and regular cyclical patterns. Such behaviour emerges because subjects’ inflation expectations fail to be captured by rational expectations functions. Instead, a Restricted Perceptions Equilibrium (RPE), which assumes that agents use optimal but ’simple’ forecast functions, describes subjects’ inflation expectations surprisingly well and explains the observed behaviour of output and inflation.
    Keywords: experiments; output and inflation dynamics; rational expectations; restricted perceptions equilibrium
    JEL: C91 E32 E37
    Date: 2005–01
  12. By: Galí, Jordi
    Abstract: The present paper revisits a property embedded in most dynamic macroeconomic models: the stationarity of hours worked. First, I argue that, contrary to what is often believed, there are many reasons why hours could be non-stationary in those models, while preserving the property of balanced growth. Second, I show that the post-war evidence for most industrialized economies is clearly at odds with the assumption of stationary hours per capita. Third, I examine the implications of that evidence for the role of technology as a source of economic fluctuations in the G7 countries.
    Keywords: non-stationary hours; real business cycles; technology shocks
    JEL: E32
    Date: 2005–02
  13. By: Lettau, Martin; Ludvigson, Sydney
    Abstract: Among the most important pieces of empirical evidence against the standard representative-agent, consumption-based asset pricing paradigm are the formidable unconditional Euler equation errors the model produces for a broad stock market index return and short-term interest rate. Unconditional Euler equation errors are also large for a broader cross-section of returns. Here we ask whether calibrated leading asset pricing models – specifically developed to address empirical puzzles associated with the standard paradigm – explain these empirical facts. We find that, in many cases, they do not. We present several results. First, we show that if the true pricing kernel that sets the unconditional Euler equation errors to zero is jointly lognormally distributed with aggregate consumption and returns, then values for the subjective discount factor and relative risk aversion can always be found for which the standard model generates identical unconditional asset pricing implications for two asset returns, a risky and risk-free asset. Second, we show, using simulated data from several leading asset pricing frameworks, that many economic models share this property even though in those models the pricing kernel, returns, and consumption are not jointly lognormally distributed. Third, in contrast to the above results, we provide an example of a limited participation/incomplete markets model that is broadly consistent with these empirical facts.
    Keywords: equity premium; Euler equation; pricing errors
    JEL: G10 G12
    Date: 2005–02
  14. By: Kocherlakota, Narayana; Pistaferri, Luigi
    Abstract: In this paper, we consider a dynamic economy in which the agents are privately informed about their skills, which evolve stochastically over time in an arbitrary fashion. We consider an asset pricing equilibrium in which equilibrium quantities are constrained Pareto optimal. Under the assumption that agents have constant relative risk aversion, we derive a novel asset pricing kernel for financial asset returns. The kernel equals the reciprocal of the gross growth of the x-th moment of the consumption distribution, where x is the coefficient of relative risk aversion. We use data from the Consumer Expenditure Survey (CEX) and show that the new stochastic discount factor performs better than existing stochastic discount factors at rationalizing the equity premium. However, its ability to simultaneously explain the equity premium and the expected return to the Treasury bill is about the same as existing discount factors.
    Keywords: asset pricing; consumer expenditure survey
    JEL: E21 G12
    Date: 2005–02
  15. By: Persson, Torsten; Persson, Mats; Svensson, Lars E O
    Abstract: This paper demonstrates how time consistency of the Ramsey policy (the optimal fiscal and monetary policy under commitment) can be achieved. Each government should leave its successor with a unique maturity structure for the nominal and indexed debt, such that the marginal benefit of a surprise inflation exactly balances the marginal cost. Unlike in earlier papers on the topic, the result holds for quite general Ramsey policies, including time-varying polices with positive inflation and positive nominal interest rates. We compare our results with those in Persson, Persson and Svensson (1987), Calvo and Obstfeld (1990), and Alvarez, Kehoe and Neumeyer (2004).
    Keywords: ramsey policy; surprise inflation; time consistency
    JEL: E31 E52 H21
    Date: 2005–03
  16. By: Hakenes, Hendrik; Irmen, Andreas
    Abstract: If capital is an essential input, the neoclassical growth model has a steady state with zero capital. From this, one is inclined to conclude that an economy starting without capital can never grow. We challenge this view and claim that, if the production function satisfies the Inada conditions, a take-off is possible even though the initial capital stock is zero and capital is essential. Since the marginal product of capital is initially infinite, the ‘trivial’ steady state becomes so unstable that the solution to the equation of motion involves the possibility of a take-off, even without capital. When it happens, the take-off is spontaneous; there is no causality.
    Keywords: capital accumulation; industrializtion; neoclassical growth model
    JEL: N60 O11 O14 O41
    Date: 2005–03
  17. By: Pissarides, Christopher; Vallanti, Giovanna
    Abstract: Theoretical predictions of the impact of TFP growth on unemployment are ambiguous, and depend on the extent to which new technology is embodied in new jobs. We evaluate a model with embodied and disembodied technology, capitalization, and creative destruction effects by estimating the impact of TFP growth on unemployment in a panel of industrial countries. We find a large negative impact which implies that embodied technology and creative destruction play no role in the steady-state dynamics of unemployment. Capitalization effects explain some of the estimated impact but a part remains unexplained.
    Keywords: capitalization effect; creative destruction; embodied technology; TFP growth; unemployment
    JEL: E24 J64 O51 O52
    Date: 2005–04
  18. By: Lungu, Laurian; Minford, Patrick
    Abstract: We develop a simple overlapping generations model in which the young have a choice in investing in equities and index-linked bonds. Projections of share price uncertainty over a 30-year period show that the risk associated with such a long-term investment predicts an equity premium that matches historical values.
    Keywords: equity premium puzzle; risk premium
    JEL: G12
    Date: 2005–04
  19. By: Hornstein, Andreas; Krusell, Per; Violante, Giovanni L
    Abstract: We examine how technological change affects wage inequality and unemployment in a calibrated model of matching frictions in the labour market. We distinguish between two polar cases studied in the literature: a ‘creative destruction’ economy where new machines enter chiefly through new matches, and an ‘upgrading’ economy where machines in existing matches are replaced by new machines. Our main results are: (i) these two economies produce very similar quantitative outcomes, and (ii) the total amount of wage inequality generated by frictions is very small. We explain these findings in light of the fact that, in the model calibrated to the US economy, both unemployment and vacancy durations are very short, i.e., the matching frictions are quantitatively minor. Hence, the equilibrium allocations of the model are remarkably close to those of a frictionless version of our economy where firms are indifferent between upgrading and creative destruction, and where every worker is paid the same market-clearing wage. These results are robust to extensions of the benchmark model that incorporate machine-specific and match-specific heterogeneity.
    Keywords: creative destruction; inequality; technical change; unemployment; upgrading
    JEL: J41 J64 O33
    Date: 2005–04
  20. By: Meenagh, David; Minford, Patrick; Nowell, Eric; Sofat, Prakriti
    Abstract: This paper establishes the ability of a Real Business Cycle model to account for real exchange rate (RXR) behaviour, using UK experience as empirical focus. We show that a productivity burst simulation is capable of explaining the appreciation of RXR and its cyclical pattern observed in the data. We then test if our model is consistent with the facts. We bootstrap our model to generate pseudo RXR series and check if the ARIMA parameters estimated for the data lie within 95% confidence limits implied by our model. We find that RXR behaviour is explicable within an RBC framework.
    Keywords: productivity; real business cycle; real exchange rate
    JEL: E32 F31 F41
    Date: 2005–04
  21. By: Krueger, Dirk; Kubler, Felix
    Abstract: This paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a Pareto improvement. When returns to capital and wages are imperfectly correlated a system that endows retired households with claims to labour income enhances the sharing of aggregate risk between generations. Our quantitative analysis shows that, abstracting from the capital crowding-out effect, the introduction of social security represents a Pareto improving reform, even when the economy is dynamically efficient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains.
    Keywords: aggregate fluctuations; incomplete markets; intergenerational risk sharing; social security reform
    JEL: D58 D91 E62 H31 H55
    Date: 2005–05
  22. By: Conesa, Juan Carlos; Krueger, Dirk
    Abstract: This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labour productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labour supply and capital accumulation decisions. Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17.2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1.7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible.
    Keywords: flat taxes; optimal taxation; progressive taxation; social insurance; transition
    JEL: E62 H21 H24
    Date: 2005–05
  23. By: Paul Gomme; Peter Rupert
    Abstract: Calibration has become a standard tool of macroeconomics. This paper extends and refines the calibration methodology along several important dimensions. First, accounting for home production is important both in measuring calibration targets and in organizing the data in a model-consistent fashion. For this reason, thinking about home production is important even if the model under consideration does not include home production. Second, investment-specific technological change is included because of its strong balanced growth parameter restrictions. Third, the measurement strategy is laid out as transparently as possible so that others can easily replicate the underlying calculations. The data and calculations used in this paper are available on the web.
    Date: 2005
  24. By: Rochelle M. Edge; Jeremy B. Rudd
    Abstract: This paper uses a dynamic general-equilibrium model with a nominal tax system to consider the effects of temporary partial expensing allowances on investment and other macroeconomic aggregates.
    Keywords: Tax incentives ; Equilibrium (Economics)
    Date: 2005
  25. By: Erwan Quintin; John J. Stevens
    Abstract: Labor market outcomes such as turnover and earnings are correlated with employer characteristics, even after controlling for observable differences in worker characteristics. We argue that this systematic relationship constitutes strong evidence in favor of models where workers choose how much to invest in future productivity. Because employer characteristics are correlated with firm survival, returns to these investments vary across firm types. We describe a dynamic general equilibrium model where workers employed in firms more likely to survive choose to devote more time to productivity enhancing activities, and therefore have a steeper earnings-tenure profile. Our model also predicts that quit rates should be lower in firms more likely to survive, and should tend to fall during slow times, while job destruction rates should rise. These predictions, we argue, are borne out by the existing empirical evidence.
    Date: 2005
  26. By: Joydeep Bhattacharya; Joseph Haslag; Antoine Martin; Rajesh Singh
    Abstract: We explore the connection between optimal monetary policy and heterogeneity among agents. We utilize a standard monetary economy with two types of agents that differ in the marginal utility they derive from real money balances-a framework that produces a nondegenerate stationary distribution of money holdings. Without type-specific fiscal policy, we show that the zero-nominal-interest-rate policy (the Friedman rule) does not maximize type-specific welfare; further, it may not maximize aggregate ex ante social welfare. Indeed one or, more surprisingly, both types of agents may benefit if the central bank deviates from the Friedman rule.
    Keywords: Monetary policy ; Interest rates ; Friedman, Milton ; Banks and banking, Central
    Date: 2005
  27. By: George Alessandria
    Abstract: This paper develops a model of consumer search consistent with the evidence of substantial price dispersion within countries. This model is used to study international relative price fluctuations. Consumer search frictions permit firms to price discriminate across markets based on the local wage of consumers. With price dispersion, the market price of a good does not measure its resource cost. This breaks the tight link between relative quantities and relative prices implied by most models. We show that volatile and persistent fluctuations in relative wages lead to volatile and persistent fluctuations in relative prices at the disaggregate level. These deviations from the law of one price substantially increase international relative price volatility. With productivity and taste shocks, the model generates international business cycles that closely match the data
    Keywords: Prices ; Consumers
    Date: 2005
  28. By: Sergio Rebelo
    Abstract: In this paper I review the contribution of real business cycles models to our understanding of economic fluctuations, and discuss open issues in business cycle research.
    JEL: E1
    Date: 2005–06
  29. By: Millan L. B. Mulraine (University of Toronto)
    Abstract: This paper re-examines the behavioral responses of key macroeconomic variables in Canada to exogenous shocks to the relative price of investment goods. It does so by developing a stylized two-sector real business cycle model which is simulated to explore its ability to shed new light on the dynamic behavior of the standard small open economy. The results indicate that this model can qualitatively and quantitatively replicate the dynamic features of the Canadian economy, and thus shocks to investment-specific technology can be considered an important propagation mechanism for studying and understanding modern macroeconomic dynamics in small open economies.
    Keywords: Endogenous rate of time preference, International real business cycle, Investment-specific shocks, Relative price of investment goods, Small open economy
    JEL: E32 E37 F41
    Date: 2005–06–10
  30. By: Eduardo L. Gimenez (Departamento de Fundamentos de Analisis Economico e Historia Economica. Universidad de Vigo.); Jose M. Martin-Moreno (Departamento de Fundamentos de Analisis Economico e Historia Economica. Universidad de Vigo.)
    Abstract: This paper examines the consequences of introducing a cash-in-advance constraint in a small open economy business cycle model for the Spanish economy. A business cycle model is built extending Correia, Neves and Rebelo (1995) small open economy framework and Cooley and Hansen (1995) monetary economy. Money is introduced through a cash-in-advance constraint. The stochastic simulation of the model and its comparation with Spanish data shows that the model is able to mimic the real dimension of the business cycle. In particular the high volatility of compsumtion for the Spanish economy is greatly reproduced. Some features of the nominal dimension are also reproduced. As a negative result the high correlation between money and output, and labor market relations are not reproduced.
    Keywords: Business Cycle, Cash-in-Advance Constraint, Small Open Economy

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