nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒01‒29
ten papers chosen by
Christian Zimmermann
University of Connecticut

  1. Search and Matching in Macroeconomics By Yashiv, Eran
  2. Rent-Seeking Competition from State Coffers: A Calibrated DSGE Model of the Euro Area By Konstantinos Angelopoulos; Apostolis Philippopoulos; Vanghelis Vassilatos
  3. Optimal Stabilization Policy with Flexible Prices By Aleksander Berentsen; Christopher Waller
  4. Oil Shocks and the Business Cycle in Europe By Baltasar Manzano; Carlos de Miguel; José Mª Martín Moreno
  5. A Life-Cycle Overlapping-Generations Model of the Small Open Economy By Heijdra, Ben J.; Romp, Ward E.
  6. Technological Revolutions and Stock Prices By Pástor, Lubos; Veronesi, Pietro
  7. The Short-Run Dynamics of Optimal Growth Models with Delays By Collard, Fabrice; Licandro, Omar; Puch, Luis
  8. Has Monetary Policy Become More Effective? By Boivin, Jean; Giannoni, Marc
  9. Social security, inequality and growth By Gilles Le Garrec
  10. Optimal Inflation Stabilization in a Medium-Scale Macroeonomic Model By Schmitt-Grohé, Stephanie; Uribe, Martín

  1. By: Yashiv, Eran
    Abstract: This paper surveys the use of search and matching models in macroeconomics. It outlines the standard model, discusses its extensions, presents alternative formulations, considers the empirical evidence, and studies applications to macroeconomic questions such as business cycles, growth, and policy. Particular attention is given to the ability of the model to account for labour market dynamics and for cyclical fluctuations in aggregate economic activity
    Keywords: business cycles; growth; macroeconomics; matching; policy; search; worker flows
    JEL: E24 E32 E52 J23 J31 J41 J63 J64 J65
    Date: 2006–01
  2. By: Konstantinos Angelopoulos; Apostolis Philippopoulos; Vanghelis Vassilatos
    Abstract: This paper incorporates an uncoordinated struggle for extra fiscal favors into an otherwise standard Dynamic Stochastic General Equilibrium model. This reflects the popular belief that interest groups compete for privileged transfers and tax treatment at the expense of the general public interest, and so the aggregate economy stagnates. The model is calibrated to the euro area over the period 1980-2003. Our results show that rent-seeking competition can contribute to explaining the European macroeconomic experience. We also get quantitative evidence of the fraction of collected tax revenues grabbed by rent seekers.
    Keywords: rent seeking, fiscal policy, real business cycles
    JEL: E32 E62 H23
    Date: 2006
  3. By: Aleksander Berentsen; Christopher Waller
    Abstract: We construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy. Prices are fully flexible and money is essential for trade. Our main result is that if the central bank pursues a long-run price path, thereby controlling inflation expectations, it can improve welfare by stabilizing short-run aggregate shocks. The optimal policy involves smoothing nominal interest rates which effectively smooths consumption across states. Failure to follow a long-run price path makes any stabilization attempt ineffective.
    JEL: E40 E50
    Date: 2005
  4. By: Baltasar Manzano; Carlos de Miguel; José Mª Martín Moreno
    Abstract: This paper analyzes the effects of oil price shocks on the business cycle of the EU-15 countries using a standard dynamic general equilibrium model for a small open economy in which oil is included as an imported productive input. The results show that oil shocks can account for a significant percentage of GDP fluctuations in many of those countries. Furthermore, we show that the increases in the relative price of oil had a negative effect on welfare, particularly in southern European countries, which are historically associated with a lax monetary policy during oil crisis.
  5. By: Heijdra, Ben J.; Romp, Ward E. (Groningen University)
    Abstract: In this paper we construct an overlapping generations model for the small open economy incorporating a realistic description of the mortality process. With agedependent mortality, the typical life-cycle pattern of consumption and saving results from the maximizing behaviour of individual households. Our ?Blanchard-Yaari-Modigliani?model is used to analytically study a number of typical shocks affecting the small open economy, namely a balanced-budget public spending shock, a temporary Ricardian tax cut, and an interest rate shock. The demographic details matter a lot?both the impulse-response functions and the welfare profiles (associated with the different shocks) are critically affected by them. These demographic details furthermore do not wash out in the aggregate. The model is flexible and can be applied to a wide variety of theoretical and policy issues.
    Date: 2005
  6. By: Pástor, Lubos; Veronesi, Pietro
    Abstract: During technological revolutions, stock prices of innovative firms tend to exhibit high volatility and bubble-like patterns, which are often attributed to investor irrationality. We develop a general equilibrium model that rationalizes the observed price patterns. The high volatility results from high uncertainty about the average productivity of a new technology. Investors learn about this productivity before deciding whether to adopt the technology on a large scale. For technologies that are ultimately adopted, the nature of uncertainty changes from idiosyncratic to systematic as the adoption becomes more likely; as a result, stock prices fall after an initial run-up. This 'bubble' in stock prices is observable ex post but unpredictable ex ante, and it is most pronounced for technologies characterized by high uncertainty and fast adoption. We examine stock prices in the early days of American railroads, and find evidence consistent with a large-scale adoption of the railroad technology by the late 1850s.
    Keywords: bubble; innovation; railroads; technology
    JEL: G1
    Date: 2006–01
  7. By: Collard, Fabrice; Licandro, Omar; Puch, Luis
    Abstract: Differential equations with advanced and delayed time arguments may arise in the optimality conditions of simple growth models with delays. Models with delayed adoption of new technologies, habit formation or learning-by-using lie in this category. In this paper we present new insight on the role of advanced time arguments to mitigate the echo effects induced by lag structures. In so doing we use optimal control theory with delays, and we propose a shooting method to deal with leads and lags in the Euler system associated to dynamic general equilibrium models in continuous time. We implement these methods to solve for the short run dynamics of a neoclassical growth model with a simple time-to-build lag.
    Keywords: DDEs; delay; shooting method; time-to-build
    JEL: C63 E32 O40
    Date: 2006–01
  8. By: Boivin, Jean; Giannoni, Marc
    Abstract: We investigate the implications of changes in the structure of the US economy for monetary policy effectiveness. Estimating a VAR over the pre- and post-1980 periods, we provide evidence of a reduced effect of monetary policy shocks in the latter period. We estimate a structural model that replicates well the economy's response in both periods, and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy's volatility. We find that by responding more strongly to inflation expectations, monetary policy has stabilized the economy more effectively in the post-1980 period.
    Keywords: dynamic general equilibrium model; habit formation; indeterminacy; minimum distance estimation; transmission of monetary policy; vector autoregression
    JEL: C32 E3 E52
    Date: 2006–01
  9. By: Gilles Le Garrec (Observatoire Français des Conjonctures Économiques)
    Date: 2005
  10. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: This paper characterizes Ramsey-optimal monetary policy in a medium-scale macroeconomic model that has been estimated to fit well postwar US business cycles. We find that mild deflation is Ramsey optimal in the long run. However, the optimal inflation rate appears to be highly sensitive to the assumed degree of price stickiness. Within the window of available estimates of price stickiness (between 2 and 5 quarters) the optimal rate of inflation ranges from -4.2 percent per year (close to the Friedman rule) to -0.4 percent per year (close to price stability). This sensitivity disappears when one assumes that lump-sum taxes are unavailable and fiscal instruments take the form of distortionary income taxes. In this case, mild deflation emerges as a robust Ramsey prediction. In light of the finding that the Ramsey optimal inflation rate is negative, it is puzzling that most inflation-targeting countries pursue positive inflation goals. We show that the zero bound on the nominal interest rate, which is often cited as a rationale for setting positive inflation targets, is of no quantitative relevance in the present model. Finally, the paper characterizes operational interest-rate feedback rules that best implement Ramsey-optimal stabilization policy. We find that the optimal interest-rate rule is active in price and wage inflation, mute in output growth, and moderately inertial.
    Keywords: interest rate rules; nominal rigidities; Ramsey policy; real rigidities
    JEL: E52 E61 E63
    Date: 2006–01

This nep-dge issue is ©2006 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.