nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒10‒22
24 papers chosen by
Christian Zimmermann
University of Connecticut

  1. Technology Shocks and Aggregate Fluctuations: How Well Does the RBC Model Fit Postwar U.S. Data? By Pau Rabanal; Jordi Galí
  2. A Simple Business-cycle Model with Schumpeterian Features By Luís Costa; Huw Dixon
  3. Convergence Properties of the Likelihood of Computed Dynamic Models By Jeus Fernandez-Villaverde
  4. Does Government Spending Crowd In Private Consumption? Theory and Empirical Evidence for the Euro Area By Günter Coenen; Roland Straub
  5. What Happens After A Technology Shock? A Bayesian Perspective By Ossama Mikhail
  6. Portfolio Choice in a Monetary Open-Economy DSGE Model By Charles Engel; Akito Matsumoto
  7. Macroeconomic Implications of the Transition to Inflation Targeting and Capital Account Liberalization in Romania By Nikolay Gueorguiev; Pelin Berkmen
  8. Monetary Exchange with Multilateral Matching By Benoît Julien; John Kennes; Ian King
  9. More on Unemployment and Vacancy Fluctuations By Dale T. Mortensen; Éva Nagypál
  10. Optimal Government Policies in Models with Heterogeneous Agents By Radim Bohacek; Michal Kejak
  11. Solving General Equilibrium Models with Incomplete Markets and Many Assets By Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University)
  12. Sticky prices, fair wages, and the co-movements of unemployment and labor productivity growth By Fabien Tripier
  13. Why Are Similar Workers Paid Differently? The Role of Social Networks By François Fontaine
  14. Productivity Shocks, Learning, and Open Economy Dynamics By Jacques Miniane
  15. Quantifying the Inefficiency of the US Social Insurance System By Mark Huggett (Georgetown University) and Juan Carlos Parra (Georgetown University)
  16. Alternative Models of Wage Dispersion By Damien Gaumont; Randall Wright; Martin Schindler
  17. How does Employment Protection Legislation Affect Unemployment in Tunisia? A Search Equilibrium Approach By Taline Koranchelian; Domenico Fanizza
  18. Is Investment in Environmental Quality a Solution to Recessions? Studying the Welfare Effects of Green Animal Spirits By Ossama Mikhail; J. Walter Milon; Richard Hofler
  19. Net Foreign Asset Positions and Consumption Dynamics in the International Economy By Fabio Ghironi; Talan B. Iscan; Alessandro Rebucci
  20. Tax Systems under Fiscal Adjustment: A Dynamic CGE Analysis of the Brazilian Tax Reform By Victor Duarte Lledo
  21. Imperfect Capital Mobility in an Open Economy Model of Capital Accumulation By Vladimir Klyuev
  22. International Capital Flows, Returns and World Financial Integration By Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University)
  23. The Monetary Transmission Mechanism By Peter N. Ireland
  24. Agent-Based Computational Modeling And Macroeconomics By Tesfatsion, Leigh S.

  1. By: Pau Rabanal; Jordi Galí
    Abstract: Our answer: Not so well. We reached that conclusion after reviewing recent research on the role of technology as a source of economic fluctuations. The bulk of the evidence suggests a limited role for aggregate technology shocks, pointing instead to demand factors as the main force behind the strong positive comovement between output and labor input measures.
    Keywords: Business cycles , United States , Economic models ,
    Date: 2005–01–05
  2. By: Luís Costa; Huw 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: Jeus Fernandez-Villaverde
    Abstract: This paper studies the econometrics of computed dynamic models. Since these models generally lack a closed-form solution, their policy functions are approximated by numerical methods. Hence, the researcher can only evaluate an approximated likelihood associated with the approximated policy function rather than the exact likelihood implied by the exact policy function. What are the consequences for inference of the use of approximated likelihoods? First, we find conditions under which, as the approximated policy function converges to the exact policy, the approximated likelihood also converges to the exact likelihood. Second, we show that second order approximation errors in the policy function, which almost always are ignored by researchers, have first order effects on the likelihood function. Third, we discuss convergence of Bayesian and classical estimates. Finally, we propose to use a likelihood ratio test as a diagnostic device for problems derived from the use of approximated likelihoods.
    JEL: C11 C15 D9 E10 E32
    Date: 2005–10
  4. By: Günter Coenen; Roland Straub
    Abstract: In this paper, we revisit the effects of government spending shocks on private consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households. Employing Bayesian inference methods, we show that the presence of non- Ricardian households is in general conducive to raising the level of consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. However, we find that there is only a fairly small chance that government spending shocks crowd in consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also because of the large negative wealth effect induced by the highly persistent nature of government spending shocks.
    Date: 2005–08–19
  5. By: Ossama Mikhail (University of Central Florida)
    Abstract: This paper investigates the effect of a positive technology shock on per capita hours worked within the class of Bayesian Vector Auto-Regressive [BVAR] models. Such a framework avoids the current debate regarding the specification issue of per capita hours [level versus first-difference stationary]. Six priors are considered and for each, we examine the impulse responses of per capita hours following a positive technology shock. The marginal posteriors of the VAR parameters are generated using the Markov Chain Monte Carlo (MCMC) Gibbs sampler. We find that the estimation of the VAR yields significantly different estimates under competing priors. Using the Francis and Ramey (2004, UCSD working paper) new measure for per capita hours, and after imposing the identifying restrictions (i.e., Blanchard-Quah and sign restrictions), the results show that per capita hours worked rise following a positive technology shock - if one [objectively] assumes a non-informative prior.
    Keywords: Bayesian Vector Auto-Regression (BVAR), Blanchard-Quah Identification, Markov Chain Monte Carlo (MCMC) Gibbs Sampler, Technology Shock, Real Business Cycle (RBC)
    JEL: E32 E24 C11
    Date: 2005–10–18
  6. By: Charles Engel; Akito Matsumoto
    Abstract: This paper develops a two-country monetary DSGE (dynamic stochastic general equilibrium) model in which households choose a portfolio of home and foreign equities, and a forward position in foreign exchange. Some goods prices are set without full information of the state. Home and foreign portfolios are not identical in equilibrium. In response to technology shocks, sticky prices generate a negative correlation between labor income and the profits of domestic firms, biasing portfolios in favor of home equities. In contrast, under flexible prices, labor income and the profits of the domestic firms are positively correlated.
    Date: 2005–08–25
  7. By: Nikolay Gueorguiev; Pelin Berkmen
    Abstract: In the near future, Romania will introduce inflation targeting and fully liberalize its capital account. This paper aims to analyze, in a dynamic general-equilibrium model with sticky prices and monopolistic competition, how these two profound changes will affect the ability of monetary policy to pursue its objective of price stability. In particular, the resilience of the current and future monetary policy regimes to shocks is evaluated against two welfare criteria: a standard central bank loss function containing the deviations of inflation, output, and the real exchange rate from their equilibrium values, and the compensating variation measure of Lucas (1987).
    Keywords: Inflation targeting , Romania , Monetary policy , Capital account liberalization ,
    Date: 2004–12–27
  8. By: Benoît Julien (Australian Graduate School of Management); John Kennes (Department of Economics, University of Copenhagen); Ian King (University of Otago)
    Abstract: This paper analyzes monetary exchange in a search model allowing for multilateral matches to be formed, according to a standard urn-ballprocess. We consider three physical environments: indivisible goods and money, divisible goods and indivisible money, and divisible goods and money. We compare the results with Kiyotaki and Wright (1993), Trejos and Wright (1995), and Lagos and Wright (2005) respectively. We find that the multilateral matching setting generates very simple and intuitive equilibrium allocations that are similar to those in the other papers, but which have important differences. In particular, surplus maximization can be achieved in this setting, in equilibrium, with a positive money supply. Moreover, with flexible prices and directed search, the first best allocation can be attained through price posting or through auctions with lotteries, but not through auctions without lotteries. Finally, analysis of the case of divisible goods and money can be performed without the assumption of large families (as in Shi (1997)) or the day and night structure of Lagos and Wright (2005).
    Keywords: monetary exchange; directed search; ex post bidding; multilateral matching
    JEL: C78 D44 E40
    Date: 2005–06
  9. By: Dale T. Mortensen (Northwestern University, NBER and IZA Bonn); Éva Nagypál (Northwestern University)
    Abstract: Shimer (2005a) argues that the Mortensen-Pissarides equilibrium search model of unemployment explains only about 10% of the response in the job-finding rate to an aggregate productivity shock. Some of the recent papers inspired by his critique are reviewed and commented on here. Specifically, we suggest that the sole problem is neither the procyclicality of the wage nor the failure to account fully for the opportunity cost of employment. Although an amended version of the model, one that accounts for capital costs and counter cyclic involuntary separations, does much better, it still explains only 40% of the observed volatility of the job-finding rate. Finally, allowing for on-the-job search does not improve the amended model’s implications for the amplification of productivity shocks.
    Keywords: labor market search, unemployment and vacancies volatility, job-finding rate, productivity shocks
    JEL: E24 E32 J41 J63 J64
    Date: 2005–09
  10. By: Radim Bohacek; Michal Kejak
    Abstract: In this paper we develop a new methodology for finding optimal government policies in economies with heterogeneous agents. The methodology is solely based on three classes of equilibrium conditions from the government’s and individual agent’s optimization problems: 1) the first order conditions; 2) the stationarity condition on the distribution function; and, 3) the aggregate market clearing conditions. These conditions form a system of functional equations which we solve numerically. The solution takes into account simultaneously the effect of government policy on individual allocations and (from the government’s point of view) optimal distribution of agents in the steady state. This general methodology is applicable to a wide range of optimal government policies in models with heterogeneous agents. We illustrate it on a steady state Ramsey problem with heterogeneous agents, finding the optimal tax schedule. JEL Keywords: Optimal macroeconomic policy, optimal taxation, computational techniques, heterogeneous agents, distribution of wealth and income
    JEL: C61 C68 D30 D58
    Date: 2005–09
  11. By: Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University) (Department of Economics, Georgetown University)
    Abstract: This paper presents a new numerical method for solving general equilibrium models with many assets. The method can be applied to models where there are heterogeneous agents, time-varying investment opportunity sets, and incomplete markets. It also can be used to study models where the equilibrium dynamics are non-stationary. We illustrate how the method is used by solving a one— and two-sector versions of a two—country general equilibrium model with production. We check the accuracy of our method by comparing the numerical solution to the one-sector model against its known analytic properties. We then apply the method to the two-sector model where no analytic solution is available. Classification-JEL Codes: C68; D52; G11.
    Keywords: Portfolio Choice; Perturbation Methods; Incomplete Markets; Asset Prices.
  12. By: Fabien Tripier (EconomiX - University of Paris X Nanterre)
    Abstract: This paper studies the co-movements of unemployment and labor productivity growth for the U.S. economy. Measures of co-movements in the frequency domain indicate that co-movements between variables differ strongly according to the frequency. First, long-term and business cycle co-movements are larger than short-term co-movements. Second, co- movements are negative in the short and long run, but positive over the business cycle. A New Keynesian model that combines nominal rigidity on the goods market (sticky prices) and real rigidity on the labor market (fair wages) is shown to be quantitatively consistent with the observed co-movements both in the long term and over the business cycle. However, the model fails to explain the short-term co-movements.
    Keywords: growth, unemployment, sticky prices, fair wages, spectral analysis
    JEL: C32 E31 E32 J41
    Date: 2005–10–18
  13. By: François Fontaine (GREMARS, Université Lille 3 and IZA Bonn)
    Abstract: We provide a matching model where identical workers are embedded in ex-ante identical social networks. Job arrival rate is endogenous and wages are bargained. We study the evolution of networks over time and characterize the equilibrium distribution of unemployment rates across networks. We emphasize that wage dispersion arises endogenously as the consequence of the dynamics of networks, firms’ strategies and wage bargaining. Moreover, contrary to a generally accepted idea, social networks do not necessary induce stickiness in unemployment dynamics. Our endogenous matching technology shows that the effects of networks on the dynamics mostly hinge on search externalities. Our endogenous framework allows us to quantify these effects.
    Keywords: social networks, matching, wage dispersion
    JEL: E24 J64 J68
    Date: 2005–09
  14. By: Jacques Miniane
    Abstract: I study the implications of productivity shocks in a model where agents observe the aggregate level of productivity but not its permanent and transitory components separately. The model's predictions under learning differ substantially from those under full information and are in line with several empirical findings: (i) the response of investment to a permanent shock is sluggish and peaks with delay; (ii) permanent shocks generate positive rather than negative savings on impact; and (iii) saving and investment are highly correlated despite the assumption of capital mobility. Unlike other standard explanations of the Feldstein-Horioka puzzle, learning induces high correlations irrespective of the assumed persistence of shocks.
    Keywords: Productivity , Current account , Savings , Economic models ,
    Date: 2004–06–14
  15. By: Mark Huggett (Georgetown University) and Juan Carlos Parra (Georgetown University) (Department of Economics, Georgetown University)
    Abstract: How far is the US social insurance system from an efficient system? We answer this question within a model where agents receive idiosyncratic, labor-productivity shocks that are privately observed. When social security and income taxation comprise the social insurance system, the maximum possible efficiency gain is equivalent to a 10.5 percent increase in consumption. This occurs when labor productivity differences are set to the permanent differences estimated in US data. Classification-JEL Codes: D80, D90, E21
    Keywords: Social Security, Idiosyncratic Shocks, Efficient Allocations, Private Information
  16. By: Damien Gaumont; Randall Wright; Martin Schindler
    Abstract: We analyze labor market models where the law of one price does not hold-that is, models with equilibrium wage dispersion. We begin by assuming workers are ex ante heterogeneous, and highlight a flaw with this approach: if search is costly, the market shuts down. We then assume workers are homogeneous, but matches are ex post heterogeneous. This model is robust to search costs, and it delivers equilibrium wage dispersion. However, we prove the law of two prices holds: generically, we cannot get more than two wages. We explore several other models, including one combining ex ante and ex post heterogeneity, which is robust and can deliver more than two-point wage distributions.
    Keywords: Prices , Wages , Wage adjustments , Labor markets , Economic models ,
    Date: 2005–03–30
  17. By: Taline Koranchelian; Domenico Fanizza
    Abstract: This paper applies a search matching model with firing restrictions to examine whether the existence of firing restrictions affects the outcome of the matching process and the natural rate of unemployment in Tunisia. The paper concludes that the removal of firing restrictions is likely to produce a favorable but limited impact on unemployment in Tunisia.
    Keywords: Employment , Tunisia , Unemployment , Labor markets , wages ,
    Date: 2005–05–20
  18. By: Ossama Mikhail (University of Central Florida); J. Walter Milon (University of Central Florida); Richard Hofler (University of Central Florida)
    Abstract: Assume that 'green accounting' has been adopted and implemented, does an investment in environmental quality play a role similar to the investment in capital in towing the economy out of a recession? To answer the question, we integrate 'green accounting' into a stochastic dynamic general equilibrium model to study the short-run consequences of investment in environmental quality and hereby addressing if there is an incentive-based fiscal environmental solution to recessions. Surprisingly and counter intuitive, we found that reducing the rate at which humans consume the environment renders a fiscal policy - that engage in environmental investment - less effective in providing a thrust out of a recession. Conditional on the proposed model and the calibrated parameters, we conclude that an increase of one percent in environmental investment will crowd out real quarterly consumption in a range from $ 102.74 billions to $ 171.11 billions, on average, in every quarter for seven years following the investment (measured in chained 2000 dollars). Therefore, we argue that investment in environmental quality is not a solution to recessions. This result is a striking contrast to the conclusion reached in Weitzman and Löfgren (1997, Journal of Environmental Economics and Management, 32 (2), 139-153).
    Keywords: Environmental Quality, Green Accounting, Stochastic Dynamic General Equilibrium models
    JEL: E32
    Date: 2005–10–18
  19. By: Fabio Ghironi; Talan B. Iscan; Alessandro Rebucci
    Abstract: We examine the effect of non-zero, long-run foreign asset positions on consumption dynamics in response to productivity shocks in a two-country, dynamic, general equilibrium model, with different discount factors across countries populated by overlapping generations of households. We then compare the model results to those of a VAR for the United States versus the rest of the G-7. In the data, we find that permanent worldwide productivity shocks lead to net foreign asset and consumption dynamics that are consistent with interpreting the United States as the impatient economy in our model and are not consistent with symmetric models with equal discount factors.
    Keywords: Terms of trade , International trade , Consumption , Productivity , Economic models ,
    Date: 2005–05–05
  20. By: Victor Duarte Lledo
    Abstract: This paper uses a dynamic computable general equilibrium model (CGE) to analyze the macroeconomic and redistributive effects of replacing turnover and financial transaction taxes in Brazil by a consumption tax. In order to approximate Brazil's compliance with its fiscal adjustment targets, the proposed reform is subject to a non increasing path for the level of public debt. Despite an increase in the average consumption tax rate in the first years after the reform, a majority of individuals experienced an increase in their lifetime welfare. This result rejects the hypothesis that the on-going fiscal adjustment effort carried on by the Brazilian government was an obstacle to the implementation of a more efficient tax system.
    Keywords: Tax reforms , Brazil , Fiscal reforms , Economic models ,
    Date: 2005–08–01
  21. By: Vladimir Klyuev
    Abstract: This paper introduces a tractable capital market friction mechanism that allows a break of the parity between domestic and external interest rates and generates a gradual evolution of capital stock and other macroeconomic variables-in contrast to the instantaneous convergence found in models with interest rate parity. The friction, derived from explicit microfoundations, is such that the cost of new loans is an increasing function of net borrowing. The paper also presents a two-sector, open economy model of capital accumulation, where the friction mechanism is combined with standard assumptions about household preferences and production technology, which generates plausible dynamics of macroeconomic variables.
    Keywords: Real effective exchange rates , Capital inflows , Capital accumulation , Economic models ,
    Date: 2004–03–09
  22. By: Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University) (Department of Economics, Georgetown University)
    Abstract: International capital flows have increased dramatically since the 1980s, with much of the increase being due to trade in equity and debt markets. Such developments are often attributed to the increased integration of world financial markets. We present a model that allows us to examine how greater integration in world financial markets affects the behavior of international capital flows and financial returns. Our model predicts that international capital flows are large (in absolute value) and very volatile during the early stages of financial integration when international asset trading is concentrated in bonds. As integration progresses and households gain access to world equity markets, the size and volatility of international bond flows fall dramatically but continue to exceed the size and volatility of international equity flows. This is the natural outcome of greater risk sharing facilitated by increased integration. We find that the equilibrium flows in bonds and stocks are larger than their empirical counterparts, and are largely driven by variations in equity risk premia. The paper also makes a methodological contribution to the literature on dynamic general equilibrium asset-pricing. We implement a new technique for solving a dynamic general equilibrium model with production, portfolio choice and incomplete markets. Classification-JEL Codes: D52; F36; G11.
    Keywords: Globalization; Portfolio Choice; Financial Integration; Incomplete Markets; Asset Prices.
  23. By: Peter N. Ireland (Boston College)
    Abstract: The monetary transmission mechanism describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact on real variables such as aggregate output and employment.  Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets.  Recent research on the transmission mechanism seeks to understand how these channels work in the context of dynamic, stochastic, general equilibrium models.
    Keywords: Monetary transmission mechanism
    JEL: E52
    Date: 2005–10–19
  24. By: Tesfatsion, Leigh S.
    Abstract: Agent-based Computational Economics (ACE) is the computational study of economic processes modeled as dynamic systems of interacting agents. This essay discusses the potential use of ACE modeling tools for the study of macroeconomic systems. Points are illustrated using an ACE model of a two-sector decentralized market economy.
    Keywords: Agent-based computational economics; Complex adaptive systems; Macroeconomics; Microfoundations;
    JEL: B4 C6 C7 D4 D5 D6 D8 L1
    Date: 2005–07–26

This nep-dge issue is ©2005 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.