nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒08‒13
nineteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. A Trend-Cycle(-Season) Filter By Matthias Mohr
  2. A Trend-Cycle(-Season) Filter: Prgoramme Code for Eviews, Excel, and MatLab By Matthias Mohr
  3. On-The-Job Search and Sorting By Pieter A. Gautier; Coen N. Teulings; Aico van Vuuren
  4. Do the "Joneses" really matter? Peer-group versus correlated effects in intertemporal consumption choice By Jürgen Maurer; André Meier
  5. A Theory of Growth and Volatility at the Aggregate and Firm Level By Diego Comin; Sunil Mulani
  6. Sustaining Social Security By Martín Gonzalez-Eiras; Dirk Niepelt
  7. Parameterized Expectations Algorithm and the Moving Bounds: a comment on convergence properties By Javier J. Pérez; A. Jesús Sánchez
  8. Evaluating Labor Market Reforms: A General Equilibrium Approach By César Alonso-Borrego; Jesús Fernández-Villaverde; José E. Galdón-Sánchez
  9. Dynamic Programming: An Introduction by Example By Joachim Zietz
  10. An Empirical Model of Growth Through Product Innovation By Rasmus Lentz; Dale T. Mortensen
  11. Solving, Estimating and Selecting Nonlinear Dynamic Economic Models without the Curse of Dimensionality By Viktor Winschel
  12. Finance, Technology and Inequality in Economic Development By Ryo Horii; Ryoji Ohdoi; Kazuhiro Yamamoto
  13. The Cyclical Behaviour of Shadow and Regular Employment By Maurizio Bovi
  14. The Acquisition of Skills over the Life-Cycle By Stuart J. Fowler; Eric R. Young
  15. Heterogeneity within Communities: A Stochastic Model with Tenure Choice By François Ortalo-Magné; Sven Rady
  16. Fiscal Spending Shocks and the Price of Investment: Evidence from a Panel of Countries By Stuart J. Fowler
  17. On using relative prices to measure capital-specific technological progress By Milton Marquis; Bharat Trehan
  18. Business Cycle Accounting-How important are technology shocks as a propagation mechanism? Some new evidence from Japan By Suparna Chakraborty
  19. Patience Capital and the Demise of the Aristocracy By Doepke, Matthias; Zilibotti, Fabrizio

  1. By: Matthias Mohr (European Central Bank)
    Abstract: This paper proposes a new univariate method to decompose a time series into a trend, a cyclical and a seasonal component: the Trend-Cycle filter (TC filter) and its extension, the Trend-Cycle-Season filter (TCS filter). They can be regarded as extensions of the Hodrick-Prescott filter (HP filter). In particular, the stochastic model of the HP filter is extended by explicit models for the cyclical and the seasonal component. The introduction of a stochastic cycle improves the filter in three respects: first, trend and cyclical components are more consistent with the underlying theoretical model of the filter. Second, the end-of- sample reliability of the trend estimates and the cyclical component is improved compared to the HP filter since the pro-cyclical bias in end- of-sample trend estimates is virtually removed. Finally, structural breaks in the original time series can be easily accounted for.
    Keywords: economic cycles, time series, filtering, trend-cycle decomposition, seasonality
    JEL: C13 C22 E32
    Date: 2005–08–03
  2. By: Matthias Mohr (European Central Bank)
    Abstract: This zip archive contains implementations of the trend-cycle-season filter in Eviews, Excel, and MatLab. The trend-cycle-season filter is another univariate method to decompose a time series into a trend, a cyclical and a seasonal component: the Trend-Cycle filter (TC filter) and its extension, the Trend-Cycle-Season filter (TCS filter), see paper ewp-em/0508004 at rs/0508/0508004.abs
    Keywords: economic cycles, time series, filtering, trend-cycle decomposition, seasonality
    JEL: C13 C22 E32
    Date: 2005–08–03
  3. By: Pieter A. Gautier (Free University of Amsterdam, Tinbergen Institute and IZA Bonn); Coen N. Teulings (SEO, University of Amsterdam, Tinbergen Institute, CEPR and IZA Bonn); Aico van Vuuren (Free University of Amsterdam)
    Abstract: We characterize the equilibrium of a search model with a continuum of job and worker types, wage bargaining, free entry of vacancies and on-the-job search. The decentralized economy with monopsonistic wage setting yields too many vacancies and hence too low unemployment compared to first best. This is due to a business-stealing externality. Raising workers’ bargaining power resolves this inefficiency. Unemployment benefits are a second best alternative to this policy. We establish simple relations between the losses in production due to search frictions and wage differentials on the one hand and unemployment on the other hand. Both can be used for empirical testing.
    Keywords: assignment, on-the-job search, search frictions, efficiency, optimal UI benefits
    JEL: J3 J6
    Date: 2005–07
  4. By: Jürgen Maurer (Institute for Fiscal Studies); André Meier
    Abstract: Recent theoretical contributions have suggested consumption externalities, or peergroup effects, as a potential explanation for some of the puzzles in macroeconomics and finance. However, the empirical relevance of peer effects for intertemporal consumption choice is a completely open question. To shed some light on the issue, we derive an extension of the standard life-cycle model that allows for consumption externalities. The analysis is complicated by the challenge of disentangling actual peer effects from merely correlated effects operating through common features or shocks within peer groups. We show how to conduct reliable inference under these circumstances based on within-group equilibrium conditions that give rise to a social multiplier. This approach can be understood as an adaptation of Manski’s "reflection problem framework" to the case of dynamic models with endogenous regressors. We estimate our model using US panel data from the PSID. While there is strong predictable consumption co-movement within peer groups, the evidence for true consumption externalities vanishes once correlated effects are adequately accounted for.
    Keywords: Consumption, Life-Cycle Model, Peer Effects, Reflection Problem
    JEL: C23 D12 D91 Z13
    Date: 2005–07
  5. By: Diego Comin; Sunil Mulani
    Abstract: This paper presents an endogenous growth model that explains the evolution of the first and second moments of productivity growth at the aggregate and firm level during the post-war period. Growth is driven by the development of both (i) idiosyncratic R&D innovations and (ii) general innovations that can be freely adopted by many firms. Firm-level volatility is affected primarily by the Schumpeterian dynamics associated with the development of R&D innovations. On the other hand, the variance of aggregate productivity growth is determined mainly by the arrival rate of general innovations. Ceteris paribus, the share of resources spent on development of general innovations increases with the stability of the market share of the industry leader. As market shares become less persistent, the model predicts an endogenous shift in the allocation of resources from the development of general innovations to the development of R&D innovations. This results in an increase in R&D, an increase in firm-level volatility, and a decline in aggregate volatility. The effect on productivity growth is ambiguous. On the empirical side, this paper documents an upward trend in the instability of market shares. It shows that firm volatility is positively associated with R&D spending, and that R&D is negatively associated with the correlation of growth between sectors which leads to a decline in aggregate volatility.
    JEL: D9 E3 L1
    Date: 2005–08
  6. By: Martín Gonzalez-Eiras; Dirk Niepelt
    Abstract: This paper analyzes the sustainability of intergenerational transfers in politico-economic equilibrium. Embedding electoral competition for the votes of old and young households in the standard Diamond (1965) OLG model, we find that intergenerational transfers naturally arise in a Markov perfect equilibrium, even in the absence of altruism, commitment, or trigger strategies. Not internalizing the negative effects of transfers for future generations, the political process partially resolves the distributive conflict between old and young voters by shifting some of the cost of social security to the unborn. As a consequence, transfers in politico-economic equilibrium are higher than what is socially optimal. Standard functional form assumptions yield closed-form solutions for the politico-economic equilibrium as well as the equilibrium supported by the Ramsey policy. The model predicts population ageing to lead to larger social security systems, but eventually lower benefits per retiree. Under realistic parameter values, it predicts a social-security tax rate close to the actual one, but higher than the Ramsey tax rate. Closed-form solutions for the case with endogenous labor supply, tax distortions, and multiple policy instruments prove the results to be robust.
    Keywords: social security, intergenerational transfers, probabilistic voting, Markov perfect equilibrium, saving, labor supply
    JEL: E62 H55
    Date: 2005
  7. By: Javier J. Pérez (Centro de Estudios Andaluces); A. Jesús Sánchez (Centro de Estudios Andaluces)
    Abstract: In this paper we analyze the convergence properties of the moving bounds algorithm to initialize the Parameterized Expectations Algorithm suggested by Maliar and Maliar (2003) [Journal of Business and Economic Statistics 1, pp. 88-92]. We carry out a Monte Carlo experiment to check its performance against some initialization alternatives based on homotopy principles. We do so within the framework of two standard neoclassical growth models. We show that: (i) speed of convergence is poor as compared to alternatives; (ii) starting from a not very accurate initial guess might prevent convergence in relatively simple models. The results suggest the need to fine tune Maliar and Maliar's method to improve its convergence properties.
    Keywords: Nonlinear models; Numerical solution methods; Parameterized Expectations algorithm; Optimal growth
    JEL: C63 E17
    Date: 2005
  8. By: César Alonso-Borrego; Jesús Fernández-Villaverde; José E. Galdón-Sánchez
    Abstract: Job security provisions are commonly invoked to explain the high and persistent European unemployment rates. This belief has led several countries to reform their labor markets and liberalize the use of fixed-term contracts. Despite how common such contracts have become after deregulation, there is a lack of quantitative analysis of their impact on the economy. To fill this gap, we build a general equilibrium model with heterogeneous agents and firing costs in the tradition of Hopenhayn and Rogerson (1993). We calibrate our model to Spanish data, choosing in part parameters estimated with firm-level longitudinal data. Spain is particularly interesting, since its labor regulations are among the most protective in the OECD, and both its unemployment and its share of fixed-term employment are the highest. We find that fixed-term contracts increase unemployment, reduce output, and raise productivity. The welfare effects are ambiguous.
    JEL: E24 C68 J30
    Date: 2005–08
  9. By: Joachim Zietz
    Abstract: Some basic dynamic programming techniques are introduced by way of example with the help of the computer algebra system Maple. The emphasis is on building confidence and intuition for the solution of dynamic problems in economics. To better integrate the material, the same examples are used to introduce different techniques. One covers the optimal extraction of a natural resource, another consumer utility maximization, and the final example solves a simple real business cycle model. Every example is accompanied by Maple computer code to make replication and extension easy.
    Keywords: Dynamic Programming; Computer-Aided Solutions; Learning by Example
    JEL: C61 A23
    Date: 2004–09
  10. By: Rasmus Lentz (University of Wisconsin-Madison, Boston University and CAM); Dale T. Mortensen (Northwestern University, NBER and IZA Bonn)
    Abstract: Productivity dispersion across firms is large and persistent, and worker reallocation among firms is an important source of productivity growth. The purpose of the paper is to estimate the structure of an equilibrium model of growth through innovation that explains these facts. The model is a modified version of the Schumpeterian theory of firm evolution and growth developed by Klette and Kortum (2004). The data set is a panel of Danish firms than includes information on value added, employment, and wages. The model's fit is good and the structural parameter estimates have interesting implications for the aggregate growth rate and the contribution of worker reallocation to it.
    Keywords: labor productivity growth, worker reallocation, firm dynamics, firm panel data estimation
    JEL: E22 E24 J23 J24 L11 L25 O3 O4
    Date: 2005–07
  11. By: Viktor Winschel (University of Mannheim)
    Abstract: A welfare analysis of a risky policy is impossible within a linear or linearized model and its certainty equivalence property. The presented algorithms are designed as a toolbox for a general model class. The computational challenges are considerable and I concentrate on the numerics and statistics for a simple model of dynamic consumption and labor choice. I calculate the optimal policy and estimate the posterior density of structural parameters and the marginal likelihood within a nonlinear state space model. My approach is even in an interpreted language twenty time faster than the only alternative compiled approach. The model is estimated on simulated data in order to test the routines against known true parameters. The policy function is approximated by Smolyak Chebyshev polynomials and the rational expectation integral by Smolyak Gaussian quadrature. The Smolyak operator is used to extend univariate approximation and integration operators to many dimensions. It reduces the curse of dimensionality from exponential to polynomial growth. The likelihood integrals are evaluated by a Gaussian quadrature and Gaussian quadrature particle filter. The bootstrap or sequential importance resampling particle filter is used as an accuracy benchmark. The posterior is estimated by the Gaussian filter and a Metropolis- Hastings algorithm. I propose a genetic extension of the standard Metropolis-Hastings algorithm by parallel random walk sequences. This improves the robustness of start values and the global maximization properties. Moreover it simplifies a cluster implementation and the random walk variances decision is reduced to only two parameters so that almost no trial sequences are needed. Finally the marginal likelihood is calculated as a criterion for nonnested and quasi-true models in order to select between the nonlinear estimates and a first order perturbation solution combined with the Kalman filter.
    Keywords: stochastic dynamic general equilibrium model, Chebyshev polynomials, Smolyak operator, nonlinear state space filter, Curse of Dimensionality, posterior of structural parameters, marginal likelihood
    JEL: E0 F0 C11 C13 C15 C32 C44 C52 C63 C68 C88
    Date: 2005–07–29
  12. By: Ryo Horii (Graduate School of Economics, Osaka University); Ryoji Ohdoi (Graduate School of Economics, Osaka University); Kazuhiro Yamamoto (Graduate School of Economics, Osaka University)
    Abstract: This paper presents an overlapping generations model with technology choice and credit market imperfections, in order to investigate a possible source of underdevelopment. The model shows that a better financial infrastructure that provides stronger enforcement of contracts facilitates the development of financial markets, which, in turn, enables firms to switch to more productive and capital-intensive technologies, thereby promoting economic development. In the presence of credit rationing, however, this technological switch widens inequality. Therefore, risk-averse agents would not be willing to improve the financial infrastructure to the level at which the technological switch occurs, resulting in a development trap. A remedy is to facilitate small firmsf adoption of the currently used technology rather than the new one.
    Keywords: Enforcement; Technological Switch; Income Distribution; Credit Rationing; Development Trap; Institutions.
    JEL: O14 O16
    Date: 2005–04
  13. By: Maurizio Bovi (Institute for Studies & Economic Analyses ISAE)
    Abstract: Using the Hodrick-Prescott filter, this paper examines the cyclical properties of the Italian labour market. Its main contribution is the empirical analysis of three different labour inputs - regular employees, regular self-employed and underground workers. Results from VAR models support the widespread view that the shadow employment functions as an improper tool for increasing the flexibility of the labour market. While the contemporaneous correlation between shadow labour and output is significant, as time passes their association looses momentum. The opposite is found for regular employees, which show significant positive correlations only with lagged output gaps. Somewhat puzzling, self- employment seems to be the less sensitive to the course of business cycles. The skewness of input distributions suggests that hiring employees is easier than firing them, while this can not be said for the other two labour gaps. Disaggregate data tell different stories. For instance, in the manufacturing sector the hidden employment is not correlated with the output, while in the trade sector the acyclical input turns out to be the recorded employees. In the transport industry, where no labour input follow the cycle, regular employees are more fired than hired.
    Keywords: Underground economy; VAR models; Labour Flexibility, Business Cycle.
    JEL: C32 C53 H26 J30
    Date: 2005–07–28
  14. By: Stuart J. Fowler; Eric R. Young
    Abstract: The cyclical behavior of the acquisition of skills over the life-cycle is investigated. The OLG model employed includes the human capital production sector of Heckman (1976) that has two possible responses in skill acquisition to a productivity shock; a substitution and an income effect. The calibrated model predicts, for all age groups, that the substitution effect dominates the income effect implying opportunity-cost considerations tend to make schooling countercyclical. However, the data on college enrollments suggests that the ability-to-pay consideration, or the income effect, is more important for the very young since enrollments for the recently graduated from high-school are procyclical. By making human capital acquisition shocks positively correlated with the TFP shock, the income effect of the young is increased thereby replicating the observed data.
    Keywords: Human Capital; OLG; Perturbation
    JEL: J24 J31 E24
    Date: 2004–04
  15. By: François Ortalo-Magné; Sven Rady
    Abstract: Standard explanations for the income heterogeneity within neighborhoods rely on differences of preferences across households and heterogeneity of the housing stock. We propose an alternative and complementary explanation. We construct a stochastic equilibrium sorting model where (1) income is the sole dimension of household heterogeneity, (2) households form state-contingent housing location plans that may involve moves over their lifetimes, (3) households choose whether to own or rent depending on the housing expenditure risk associated with each tenure mode, and (4) there is a probability that newcomer households move in and compete for homes with native households. Income mixing within neighborhood arises for two reasons. First, allowing natives to form state-contingent housing location plans breaks the indivisibility of housing consumption implicit in the literature where households choose their location once and for all. Second, natives can insure themselves against rent fluctuations by buying their home prior to the realization of the population shock; newcomers cannot. As a result, poorer natives stay in the more desirable communities and only richer newcomers move in these communities. Evidence from U.S. metropolitan areas supports the effects predicted by the model.
    JEL: D31 R12 R21
    Date: 2005
  16. By: Stuart J. Fowler
    Abstract: The effects of fiscal spending shocks are estimated by the introduction of a measure of fiscal policy into the neoclassical growth model via a parametric function that distorts the value of newly created capital. The model is estimated by Method of Simulated Moments (MSM) via conditional moments (IRFs) from a panel of countries. We find that fiscal spending distortions cannot be rejected as an important determinant for deviations in the relative price of investment for the OECD countries. An implication is that a one standard error shock to fiscal spending can increase GDP by as much as 1.12 percent over an eight year horizon. Alternatively, the price of investment seems not to be affected by fiscal policy shocks in less developed countries.
    Keywords: General Equilibrium Dynamics; Fiscal Spending Shocks; Method of Simulated Moments
    JEL: E32 O40
    Date: 2005–02
  17. By: Milton Marquis; Bharat Trehan
    Abstract: Recently, Greenwood, Hercowitz and Krusell (GHK) have identified the relative price of (new) capital with capital-specific technological progress. In a two-sector growth model, however, the relative price of capital equals the ratio of the productivity processes in the two sectors. Restrictions from this model are used with data on wages and prices to construct measures of productivity growth and test the GHK identification, which is easily rejected by the data. This raises questions about various measures of the contribution that capital-specific technological progress might make to the economy. This identification also induces a negative correlation between the resulting measures of capital-specific and economy-wide technological change, which potentially explains why papers employing this identification find that capital-specific technological change accelerated in the mid-1970s. We impose structure on the productivity measures based on their long run behavior and find evidence of a slowdown in productivity in the 1970s that is common to both sectors and an acceleration in the mid-1990s that is exclusive to the capital sector.
    Keywords: Prices ; Technology
    Date: 2005
  18. By: Suparna Chakraborty (University of Minnesota)
    Abstract: This paper investigates the role of technology shocks as a propagation mechanism for business cycles using the new technique of business cycle accounting (BCA) and some new evidence from Japan. BCA technique enables us to model the economy as a standard growth model, but extends it to allow multiple propagation channels (referred to as wedges). Applying it to Japan during the period 1980 to 2000, I find that though technology shocks play an important role in propagating market frictions, they are by no means enough to account for the observed economic fluctuations. Investment wedges play a major role, something that standard RBC models fail to recognize and consequently tends to overemphasize the role of technology shocks.
    Keywords: business cycle accounting, wedges, propagation mechanism, technology, aggregate fluctuations, japan
    JEL: E
    Date: 2005–08–02
  19. By: Doepke, Matthias; Zilibotti, Fabrizio
    Abstract: We model the decision problem of a parent who chooses an occupation and invests in the patience of her children. The two choices complement each other: patient individuals choose occupations with a steep income profile; a steep income profile, in turn, leads to a strong incentive to invest in patience. In equilibrium, society becomes stratified along occupational lines. The most patient people are those in occupations requiring the most education and experience. The theory can account for the demise of the British land-owning aristocracy in the nineteenth century, when rich landowners proved unable to profit from new opportunities arising with industrialization, and were thus surpassed by industrialists rising from the middle classes.
    Keywords: British aristocracy; capital accumulation; discount factor; income distribution; Industrial Revolution; patience
    JEL: N23 O14 O15 Z10
    Date: 2005–06

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