nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒11‒12
seven papers chosen by
Christian Zimmermann
University of Connecticut

  1. Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks. By Julio Davila; Jay H. Hong; Per Krusell; José-Victor Rios Rull
  2. Money and Monetary Policy in Stochastic General Equilibrium Models By Arnab Bhattacharjee; Christoph Thoenissen
  3. Household Debt and Income Inequality, 1963-2003 By Matteo Iacoviello
  4. Endogenous persistent inequality. By Falilou Fall
  5. Worker Absenteeism in Search Equilibrium By Engström, Per; Holmlund, Bertil
  6. The Information Technology Revolution and the Puzzling Trends in Tobin’s average q By Adrian Peralta-Alva
  7. Schooling and Public Capital in a Model of Endogenous Growth By P R Agénor

  1. By: Julio Davila (CERMSEM, University of Pennsylvania et ECARES (ULB)); Jay H. Hong (University of Pennsylvania); Per Krusell (Princeton University, IIES et CAERP); José-Victor Rios Rull (University of Pennsylvania et CAERP)
    Abstract: We investigate the welfare properties of the one-sctor neoclassic growth model with uninsurable idiosyncratic shocks. We focus on the constrained efficiency notion of the general equiibrium literature, and we demonstrate constrained inefficiency for our model. We provide a characterization of constrained efficiency that uses the first-order condition of a constrained planner's problem that points to the margins of relevance for whether capital is too high or too low : the income composition of the (consumption) poor. We calibrate our benchmark model parameters governing idiosyncratic risks to the U.S. earnings and wealth distribution, and for this distribution the income of the poor is mainly composed of labor earnings. We compute the constrained-efficient allocations -including transition dynamics- for our model economy, and we conclude that the long-run capital stock in a laissez faire world is not only too low, but much too low. We also show that one can find parameterizations with different qualitative features : in one case, the steady-state capital stock is too high, and in another case no steady state exists.
    Keywords: Constrained efficiency, idiosyncratic risk, neoclassical growth model.
    JEL: O41
    Date: 2005–07
  2. By: Arnab Bhattacharjee; Christoph Thoenissen
    Abstract: We compare three methods of motivating money in New Keynesian DSGE Models: Money-in-the-utility function, shopping time and cash-in-advance constraint, as well as two ways of modelling monetary policy, interest rate feedback rule and money growth rules. We use impulse response analysis, and a set of econometric measures of the distance between model and data variance-covariance matrices to compare the different models. We find that the models closed by an estimated interest rate feedback rule imply counter-cyclical policy and inflation rates, which is at odds with the data. This problem is robust to the introduction of demand side shocks, but is not a feature of models closed by an estimated money growth rule. Drawing on our econometric analysis, we argue that the cash-in-advance model, closed by a money growth rule, comes closest to the data.
    Keywords: Intertemporal macroeconomics, role of money, monetary policy, model selection, moment matching.
    JEL: C13 E32 E52
    Date: 2005–10
  3. By: Matteo Iacoviello (Boston College)
    Abstract: I construct a heterogeneous agents economy that mimics the time-series behavior of the US earnings distribution from 1963 to 2003. Agents face aggregate and idiosyncratic shocks and accumulate real and financial assets. I estimate the shocks driving the model using data on income inequality, on aggregate income and on measures of financial liberalization. I show how the model economy can replicate two empirical facts: the trend and cyclical behavior of household debt, and the diverging patterns in consumption and wealth inequality over time. In particular, I show that, while short-run changes in household debt can be accounted for by aggregate fluctuations, the rise in household debt of the 1980s and the 1990s can be quantitatively explained only by the concurrent increase in income inequality.
    Keywords: Credit constraints, Incomplete Markets, Income Inequality, Household Debt
    JEL: E31 E32 E44 E52 R21
    Date: 2005–11–03
  4. By: Falilou Fall (EUREQua)
    Abstract: The purpose of this paper is to demonstrate that inherited humain capital is a powerful vector of inequality formation and persistence, irrespective of its links with financial wealth endowment. This paper argues that the agents who inherit a low level of human capital bear a greater utility cost in their educational investment and that there are different profiles of returns on human capital within the economy. These two arguments are sufficient to generate an endogenous formation of workers' and entrepreneurs' groups and a continuum of steady states with inequality. Allowing for self-employment in the model generates the possibility of equality at equilibrium in addition to the inequality equilibrium with the emergence of a middle class.
    Keywords: Endogenous inequality, human capital, occupational choice, education.
    JEL: J24 J62 J31 D33
    Date: 2005–10
  5. By: Engström, Per (Department of Economics); Holmlund, Bertil (Department of Economics)
    Abstract: The paper presents a tractable general equilibrium model of search unemployment that incorporates absence from work as a distinct labor force state. Absenteeism is driven by random shocks to the value of leisure that are private information to the workers. Firms offer wages, and possibly sick pay, so as to maximize expected profits, recognizing that the compensation package affects the queue of job applicants and possibly the absence rate as well. Shocks to the value of leisure among nonemployed individuals interact with their search decisions and trigger movements into and out of the labor force. The analysis provides a number of results concerning the impact of social insurance benefits and other determinants of workers’ and firms’ behavior. For example, higher nonemployment benefits are shown to increase absenteeism among employed workers. The normative anlysis identifies externalities associated with firm-provided sick pay and examines the welfare implications of alternative policies. Conditions are given under which welfare equivalence holds between publicly provided and firm-provided sick pay. Benefit differentiation across states of non-work are found to be associated with non-trival welfare gains.
    Keywords: Absenteeism; search; unemployment; social insurance
    JEL: J21 J64 J65
    Date: 2005–11–01
  6. By: Adrian Peralta-Alva (University of Miami)
    Abstract: A growing literature argues that the Information Technology rev- olution caused the stock market crash of 1973-1974, its subsequent stagnation and eventual recovery. This paper employs general equi- librium theory to test whether this good news hypothesis is consistent with the behavior of US equity prices and with the trends in corpo- rate output, investment and consumption. I …nd it is not. A model based exclusively on good news can make equity prices fall as much as in the data but it must also imply a strong economic expansion right when the US economy stagnated. However, when the observed productivity slowdown in old production methods is incorporated into the model consistency with major macroeconomic aggregates can be achieved and a 20% drop in equity values can be accounted for. (JEL E44, O33, O41)
    Keywords: Stock Market, Tobin's q Technological Change, Productivity Slowdown 1974, Information Technology Revolution
    JEL: O P
    Date: 2005–11–03
  7. By: P R Agénor
    Abstract: This paper studies the allocation of public spending between education services and infrastructure investment in an endogenous growth model where public capital in infrastructure affects the process of human capital accumulation. The balanced growth path is derived and the dynamics associated with a budget-neutral reallocation of spending from education to infrastructure are studied through numerical simulations. The growth-maximizing tax rate is shown to depend only on the production technology (as in standard flow models of public expenditure), whereas the optimal share of infrastructure investment depends also on the "productiveness" of infrastructure (relative to education services) in the schooling technology.
    Date: 2005

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