nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒07‒03
five papers chosen by
Christian Zimmermann
University of Connecticut

  1. Real Exchange Rate and Consumption Fluctuations following Trade Liberalization By Jönsson, Kristian
  2. Managerial Skill Acquisition and the Theory of Economic Development By Paul Beaudry; Patrick Francois
  3. Hours Worked: Long-Run Trends By Jeremy Greenwood; Guillaume Vandenbroucke
  4. Endogenous Growth in the Presence of Informal Credit Markets: A Comparative Analysis Between Credit Rationing and Self-Revelation Regimes By Basab Dasupta
  5. A Generic Model of Financial Repression By Rangan Gupta

  1. By: Jönsson, Kristian (Research Department, Central Bank of Sweden)
    Abstract: Two-sector models with traded and non-traded goods have problems accounting for the stylized fact that the real exchange rate appreciates and consumption booms for several years following trade liberalization, or exchange-rate-based stabilization programs, in small open economies. The paper studies three potential solutions to this ‘price-consumption puzzle’ and evaluates their quantitative importance in calibrated simulations of Spain’s accession to the European Community in 1986. Extending the standard two-sector framework, the paper investigates the effects of relative productivity growth in the traded sector along the lines of Balassa-Samuelson, of time-to-build, and of habit formation in preferences. In contrast to previous studies, we find that habit formation on its own does not enable the model to account for the observed real exchange rate and consumption dynamics. The analysis shows that a calibrated version of the model augmented with all three mechanisms can account for much of the price-consumption dynamics after trade liberalization, without losing explanatory power for other real variables in the Spanish economy after 1986.
    Keywords: Non-traded goods; Balassa-Samuelsson; Time-to-build; Habit formation; Dynamic general equilibrium
    JEL: C68 F41
    Date: 2005–07–01
  2. By: Paul Beaudry; Patrick Francois
    Abstract: Micro level studies in developing countries suggest managerial skills play a key role in the adoption of modern technologies. The human resources literature suggests that managerial skills are difficult to codify and learn formally, but instead tend to be learned on the job. In this paper we present a model of the interactive process between on-the-job managerial skill acquisition and the adoption of modern technology. The environment considered is one where all learning possibilities are internalized in the market, and where managers are complementary inputs to non-managerial workers. The paper illustrates why some countries may adopt modern technologies while others stay backwards. The paper also explains why managers may not want to migrate from rich countries to poor countries as would be needed to generate income convergence.
    JEL: O14 O33
    Date: 2005–07
  3. By: Jeremy Greenwood (University of Rochester); Guillaume Vandenbroucke (University of Rochester)
    Abstract: For 200 years the average number of hours worked per worker declined, both in the market place and in the home. Technological progress is the engine of such transformation. Three mechanisms are stressed: (i) The rise in real wages and its corresponding wealth effect; (ii) The enhanced value of time off from work, due to the advent of time-using leisure goods; (iii) The reduced need for housework, due to the introduction of time-saving appliances. These mechanisms are incorporated into a model of household production. The notion of Edgeworth-Pareto complementarity/substitutability is key to the analysis. Numerical examples link theory and data.
    Keywords: Hours worked, leisure, housework, household production, Edgeworth-Pareto complementarity/substitutability, technological progress
    JEL: E24 J22 O11 O33
    Date: 2005–06
  4. By: Basab Dasupta (University of Connecticut)
    Abstract: This paper examines whether the presence of informal credit markets reduces the cost of credit rationing in terms of growth. In a dynamic general equilibrium framework, we assume that firms are heterogenous with different degrees of risk and households invest in human capital development. With the help of Indian household level data we show that the informal market reduces the cost of rationing by increasing the growth rate by 0.7 percent. This higher growth rate, in the presence of an informal sector, is due to the ability of the informal market to separate the high risk from the low risk firms thanks to better information. But even after such improvement we do not get the optimum outcome. The findings, based on our second question, suggest that the revelation of firms' type, based on incentive compatible pricing, can lead to almost 2 percent higher growth rate as compared to the credit rationing regime with informal sector.
    Keywords: credit rationing, informal credit markets, self revelation mechanism
    JEL: O16 O17
    Date: 2005–06
  5. By: Rangan Gupta (University of Connecticut)
    Abstract: The paper develops a standard neoclassical growth model in an overlapping generations framework of a financially repressed small open economy, and analyzes the effects of financial liberalization on steady-state capital stock. Repression is severe "enough" to generate an unofficial money market. The economy is also characterized by capital controls and crawling peg exchange rate regime. The following observations are made: Deregulation of interest rate reduces the steady-state stock of capital, while reduction in the multiple reserve requirements and increases in the rate of crawling, enhances it. The paper thus advocates financial liberalization policies to be oriented towards reduction of reserve requirements rather than interest rate deregulation.
    Keywords: Financial Repression; Capital Stock and Investment; Uno±cial Financial Markets.
    JEL: E22 E44 E52
    Date: 2005–06

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