nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒10‒15
nine papers chosen by
Christian Zimmermann
University of Connecticut

  1. Stabilization versus insurance: welfare effects of procyclical taxation under incomplete markets By James S. Costain; Michael Reiter
  2. A Simple Business-Cycle Model with Schumpeterian Features By Luis F Costa; Huw D Dixon
  3. Forecasting Performance of an Open Economy Dynamic Stochastic General Equilibrium Model By Adolfson, Malin; Lindé, Jesper; Villani, Mattias
  4. On-the-job search, productivity shocks, and the individual earnings process. By Fabien Postel-Vinay; Hélène Turon
  5. "The Effects of the Loss of Skills on Unemployment Fluctuations" By Julen Esteba-Pretel
  6. More on Unemployment and Vacancy Fluctuations By Dale T. Mortensen
  7. "Public Debt and Economic Growth in an Aging Japan" By Toshihiro Ihori; Ryuta Ray Kato; Masumi Kawade; Shun-ichiro Bessho
  8. Search, Mismatch and Unemployment By Maite Blázquez; Marcel Jansen
  9. "Precautionary Saving under LiquidityConstraints: Evidence from Rural Pakistan" By Jeong-Joon Lee; Yasuyuki Sawada

  1. By: James S. Costain; Michael Reiter
    Abstract: We construct and calibrate a general equilibrium business cycle model with unemployment and precautionary saving. We compute the cost of business cycles and locate the optimum in a set of simple cyclical fiscal policies. Our economy exhibits productivity shocks, giving firms an incentive to hire more when productivity is high. However, business cycles make workers' income riskier, both by increasing the unconditional probability of unusually long unemployment spells, and by making wages more variable, and therefore they decrease social welfare by around one-fourth or one-third of 1% of consumption. Optimal fiscal policy offsets the cycle, holding unemployment benefits constant but varying the tax rate procyclically to smooth hiring. By running a deficit of 4% to 5% of output in recessions, the government eliminates half the variation in the unemployment rate, most of the variation in workers'aggregate consumption, and most of the welfare cost of business cycles.
    Keywords: Real business cycles, matching, precautionary saving, unemployment insurance, fiscal policy, incomplete markets, heterogeneity, computation
    JEL: E24 E32 E62 E63 H21 J64 J65
    Date: 2004–11
  2. By: Luis F Costa; Huw D Dixon
    Abstract: We develop a dynamic general equilibrium model of imperfect competition where a sunk cost of creating a new product regulates the type of entry that dominates in the economy: new products or more competition in existing industries. Considering the process of product innovation is irreversible, introduces hysteresis in the business cycle. Expansionary shocks may lead the economy to a new 'prosperity plateau,' but contractionary shocks only affect the market power of mature industries.
    Keywords: Entry; hysteresis, mark-up
    JEL: E62 L13 L16
  3. By: Adolfson, Malin (Research Department, Central Bank of Sweden); Lindé, Jesper (Research Department, Central Bank of Sweden); Villani, Mattias (Research Department, Central Bank of Sweden)
    Abstract: This paper analyzes the forecasting performance of an open economy DSGE model, estimated with Bayesian methods, for the Euro area during 1994Q1-2002Q4. We compare the DSGE model and a few variants of this model to various reduced form forecasting models such as several vector autoregressions (VAR), estimated both by maximum likelihood and two different Bayesian approaches, and traditional benchmark models, e.g. the random walk. The accuracy of the point forecasts are assessed in a traditional out-of-sample rolling event evaluation using several univariate and multivariate measures. Forecast intervals are evaluated in different ways and the log predictive score is used to summarize the precision in the joint forecast distribution as a whole. We also discuss the role of Bayesian model probabilities and other frequently used low-dimensional summaries, e.g. the log determinant statistic, as measures of overall forecasting performance.
    Keywords: Bayesian inference; Forecasting; Open economy DSGE model; Vector autoregressive models
    JEL: C11 C32 E37 E47
    Date: 2005–09–01
  4. By: Fabien Postel-Vinay; Hélène Turon
    Abstract: Individual labor earnings observed in worker panel data have complex, highly persistent dynamics. We investigate the capacity of a structural job search model with i.i.d. productivity shocks to replicate salient properties of these dynamics, such as the covariance structure of earnings, the evolution of individual earnings mean and variance with the duration of uninterrupted employment, or the distribution of year-to-year earnings changes. Specifically, we show within an otherwise standard job search model how the combined assumptions of on-the-job search and wage renegotiation by mutual consent act as a quantitatively plausible "internal propagation mechanism" of i.i.d. productivity shocks into persistent wage shocks. The model suggests that wage dynamics should be thought of as the outcome of a specific acceptance/rejection scheme of i.i.d. productivity shocks. This offers an alternative to the conventional linear ARMA-type approach to modelling earnings dynamics. Structural estimation of our model on a 10-year panel of highly educated British workers shows that our simple framework produces a dynamic earnings structure which is remarkably consistent with the data.
    Date: 2005
  5. By: Julen Esteba-Pretel (Faculty of Economics, University of Tokyo)
    Abstract: This paper studies the effects of the loss of skills on the persistence of unemployment and other macroeconomic variables. It combines a Real Business Cycle model with a search and matching labor market to explain how the loss of skill of workers and the subsequent decrease in their probability of finding new jobs creates more persistent business cycles. The paper proves that the introduction of this mechanism improves the performance of the model and is able to replicate cross country differences in unemployment and output persistence.
    Date: 2005–09
  6. By: Dale T. Mortensen
    Abstract: Shimer (2005a) argues that the Mortensen-Pissarides equilibrium search model of unemployment grossly under predicts the size of the response in the job finding rate to a productivity shock. Some of the recent papers inspired by his critique are reviewed and commented on here. Specifically, I suggest that the problem is not procylciality of the wage, as Shimer, Hall (2005), and Hall and Milgrom (2005) argue, or a failure to account fully for the opportunity cost of employment, as Hagedorn and Manovskii (2005) contend. Instead, I show that a properly calibrated variant of the model, one that accounts for capital cost, counter cyclic involuntary separations, and the large flow of workers from job-to-job, can explain the observed volatility of the job finding rate.
    JEL: E2 G0 J0
    Date: 2005–10
  7. By: Toshihiro Ihori (Faculty of Economics, University of Tokyo); Ryuta Ray Kato (Graduate School of International Relations, International Univesity of Japan); Masumi Kawade (Faculty of Economics, Niigata University); Shun-ichiro Bessho (Policy Research Institute, Ministry of Finance, Japanese Government)
    Abstract: This@paper@examines@the@effects of the demographic change and the government debt policy in Japan on economic growth and economic welfare, particularly by taking into account the existing public pension scheme as well as national medical expenditure through the existing public health insurance, wherea computational overlapping generations model is used within a general equilibrium context. One of the main results of this paper is that the tax burden (GDP) ratio will increase up to about 36%, and the social security burden (GDP) ratio will increase up to 23.3% in 2050, even though the government tries to have a positive primary balance by 2010. The ratio of public health insurance bene?ts to GDP is expected to increase at 1% every 10years, and the ratio will be around 9.6%in 2050. The 2004 public pension reform will successfully result in a 13 point decrease in the contribution rate from 36.44% to 23.53%, and reduce the social security burden (GDP) ratio by about 8 points from 23.27% to 15.02% in 2050, compared with the benchmark case.
    Date: 2005–09
  8. By: Maite Blázquez (Amsterdam Institute for Advanced Labour Studies University of Amsterdam); Marcel Jansen (Universidad Carlos III de Madrid)
    Keywords: Matching, ex post bargaining, heterogeneity, efficiency
    JEL: C78 D61 J64
    Date: 2005–10–12
  9. By: Jeong-Joon Lee (Department of Economics, Towson University); Yasuyuki Sawada (Faculty of Economics, University of Tokyo)
    Abstract: This paper investigates precautionary saving under liquidity constraints in Pakistan using household panel data. In particular, while we estimates Kimball's (1990) prudence parameter, we deviate from Dynan's (1993) framework by explicitly considering liquidity constraints, as in Zeldes (1989). By doing so,we attempt to diffeerentiate the standard precautionary saving caused by uncertainty from the oneduetoliquidity constraints. Furthermore, endogenous liquidity constraints are considered toresolveis-sues of selection biases. In this study, we document substantial evidence of the presence of precautionary saving in Pakistan. More specifically, the estimated prudence is significantly higher for liquidity-constrainedhouse-holds as compared with unconstrained ones. The results support the emerging view that facilitating saving may often be more important than finding better ways of lending to the poor.
    Date: 2005–09

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