nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒10‒08
seven papers chosen by
Christian Zimmermann
University of Connecticut

  1. Separating the Business Cycle from Other Economic Fluctuations By Robert E. Hall
  2. Closed form solutions to a generalization of the Solow growth model. By Erick José Limas Maldonado; Juan Gabriel Brida
  3. Uninsured Idiosyncratic Production Risk with Borrowing Constraints By Francisco Covas
  4. Is It Is or Is It Ain%u2019t My Obligation? Regional Debt in a Fiscal Federation By Russell Cooper; Hubert Kempf; Dan Peled
  5. Habits in Consumption, Transactions Learning And Economic Growth. By Constantin Gurdgiev;
  6. Will China Eat Our Lunch or Take Us Out to Dinner? Simulating the Transition Paths of the U.S., EU, Japan, and China By Hans Fehr; Sabine Jokisch; Laurence J. Kotlikoff
  7. Macroeconomic Theory and Policy By David Andolfatto

  1. By: Robert E. Hall
    Abstract: Macroeconomists——especially those studying monetary policy——often view the business cycle as a transitory departure from the smooth evolution of a neoclassical growth model. Important ideas contributed by Friedman, Lucas, and the developers of the sticky-price macro model generate this type of aggregate behavior. But the real-business cycle model shows that the neoclassical model implies anything but smooth growth. A purely neoclassical model, devoid of anything resembling a business cycle in the sense of transitory departures from neoclassical equilibrium, nevertheless explains most of the volatility of GDP growth at all frequencies. Monetary policymakers looking to a neoclassical model to provide the neutral levels of key variables-potential GDP, the natural rate of unemployment, and the equilibrium real interest rate, need to solve a complicated and controversial model to find these constructs. They cannot take average or smoothed values of actual data to find them. Further, low-frequency movements of unemployment suggest a failure of the basic idea that departures from the neoclassical equilibrium are transitory. I discuss new theories of the labor market capable of explaining the low-frequency movements of unemployment. I conclude that monetary policymakers should not try to discern neutral values of real variables. Some branches of modem theory do not support the concepts of potential GDP, the natural rate of unemployment, and the equilibrium real interest rate. Even the theories that do support the concepts suggest that measurement in real time is impractical.
    JEL: E32 E52
    Date: 2005–10
  2. By: Erick José Limas Maldonado (Universidad Autónoma de Ciudad Juárez, México.); Juan Gabriel Brida (School of Economics & Management - Free University of Bolzano, Italy)
    Abstract: The Solow growth model assumes that labor force grows exponentially. This is not a realistic assumption because, exponential growth implies that population increases to infinity as time tends to infinity. In this paper we propose replacing the exponential population growth with a simple and more realistic equation - the Von Bertalanffy model. This model utilizes three hypotheses about human population growth: (1) when population size is small, growth is exponential; (2) population is bounded; and (3) the rate of population growth decreases to zero as time tends toward infinity. After making this substitution, the generalized Solow model is then solved in closed form, demonstrating that the intrinsic rate of population growth does not influence the long-run equilibrium level of capital per worker. We also study the revised model's stability, comparing it with that of the classical model.
    Keywords: Solow growth model, population growth
    JEL: C62 O41
    Date: 2005–10–06
  3. By: Francisco Covas
    Abstract: The author analyzes a general-equilibrium model of a heterogeneous agents economy in which the agents are subject to borrowing constraints and uninsurable idiosyncratic production risk. In particular, he addresses the impact of these frictions on entrepreneurial investment and illustrates the trade-off between production risk and precautionary savings faced by the entrepreneur. In contrast to other studies, the author's results suggest that, when entrepreneurs' earnings are poorly diversified and production risk mainly affects the total output produced, the underaccumulation of capital in the entrepreneurial sector of the model economy is less likely to hold, because of a strong precautionary savings motive. Furthermore, the presence of these frictions on entrepreneurial investment exacerbates the overaccumulation of capital in the corporate sector of the economy that is reported in Bewley models with uninsurable labour income risk.
    Keywords: Economic models; Financial institutions; Financial markets
    JEL: E22 G11 M13
    Date: 2005
  4. By: Russell Cooper; Hubert Kempf; Dan Peled
    Abstract: This paper studies the repayment of regional debt in a multi-region economy with a central authority: who pays the obligation issued by a region? With commitment, a central government will use its taxation power to smooth distortionary taxes across regions. Absent commitment, the central government may be induced to bailout the regional government in order to smooth consumption and distortionary taxes across the regions. We characterize the conditions under which bailouts occur and their welfare implications. The gains to creating a federation are higher when the (government spending) shocks across regions are negatively correlated and volatile. We use these insights to comment on actual fiscal relations in three quite different federations: the US, the European Union and Argentina.
    JEL: E6 F4 R5
    Date: 2005–10
  5. By: Constantin Gurdgiev; (Department of Economics, Trinity College)
    Abstract: This paper presents a model of endogenous growth in the presence of habit formation in consumption. We argue that in addition to the traditional disutility effects of habitual consumption, the past history of consumption represents a past record of transactions as well. As a result, the knowledge acquired in the process of past consumption leads to efficiency gains in allocating time to other activities. In particular, the investment technology in broad household capital can be seen as benefiting from the habitual consumption knowledge, while being subject to the costly new consumption pathways learning. These learning-by-consuming effects imply a faster speed of convergence to the steady state growth rate in consumption and a higher steady state ratio of capital to habits. Alternatively our model allows for the case where new consumption is associated with the accumulation of broad capital, as is consistent with the case where consumption goods can also be used in production. In this case convergence to steady state growth rate is slower.
    JEL: D13 E21 E22 O40
    Date: 2005–08
  6. By: Hans Fehr; Sabine Jokisch; Laurence J. Kotlikoff
    Abstract: This paper develops a dynamic, life-cycle, general equilibrium model to study the interdependent demographic, fiscal, and economic transition paths of China, Japan, the U.S., and the EU. Each of these countries/regions is entering a period of rapid and significant aging requiring major fiscal adjustments. In previous studies that excluded China we predicted that tax hikes needed to pay benefits along the developed world's demographic transition would lead to capital shortage, reducing real wages per unit of human capital. Adding China to the model dramatically alters this prediction. Even though China is aging rapidly, its saving behavior, growth rate, and fiscal policies are very different from those of developed countries. If this continues to be the case, the model's long run looks much brighter. China eventually becomes the world's saver and, thereby, the developed world's savoir with respect to its long-run supply of capital and long-run general equilibrium prospects. And, rather than seeing the real wage per unit of human capital fall, the West and Japan see it rise by one fifth by 2030 and by three fifths by 2100. These wage increases are over and above those associated with technical progress.
    JEL: E2 E4 H2 H3 H5 H6 J1
    Date: 2005–10
  7. By: David Andolfatto (Simon Fraser University)
    JEL: E
    Date: 2005–10–04

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