nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒02‒05
seventeen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Monetary policy analysis with potentially misspecified models By Marco Del Negro; Frank Schorfheide
  2. Non-stationary hours in a DSGE model By Yongsung Chang; Taeyoung Doh; Frank Schorfheide
  3. Risk Sharing and Efficiency Implications of Progressive Pension Arrangements By Hans Fehr; Christian Habermann
  4. Aging, Pension Reform, and Capital Flows: A Multi-Country Simulation Model By Axel Börsch-Supan; Alexander Ludwig; Joachim Winter
  5. Inflation and money: a puzzle By Peng-fei Wang; Yi Wen
  7. Calvo Wages in a Search Unemployment Model By Vincent Bodart; Olivier Pierrard; Henri R. Sneessens
  8. Does Social Security Privatization Produce Efficiency Gains? By Shinichi Nishiyama; Kent Smetters
  9. Lessons From the Debt-Deflation Theory of Sudden Stops By Enrique G. Mendoza
  10. Private Information, Wage Bargaining and Employment Fluctuations By John Kennan
  11. Solving linear difference systems with lagged expectations by a method of undetermined coefficients By Peng-fei Wang; Yi Wen
  12. Product Market Deregulation and the U.S. Employment Miracle By Monique Ebell; Christian Haefke
  13. Endogenous Mortality, Human Capital and Endogenous Growth By Osang, Thomas; Sarkar, Jayanta
  14. Macroeconomic volatility and the equity premium By Keith Sill
  16. TECHNOLOGICAL PROGRESS AND DEPRECIATION By Raouf Boucekkine; Blanca Martínez; Fernando del Río
  17. Escaping the Samaritan's dilemma: implications of a dynamic model of altruistic intergenerational transfers By Maria Perozek

  1. By: Marco Del Negro; Frank Schorfheide
    Abstract: The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long-run dynamics that are at odds with the data. Relaxing these restrictions can close the gap between DSGE models and vector autoregressions. This paper modifies a simple stochastic growth model by incorporating permanent labor supply shocks that can generate a unit root in hours worked. Using Bayesian methods the authors estimate two versions of the DSGE model: the standard specification in which hours worked are stationary and the modified version with permanent labor supply shocks. The authors find that the data support the latter specification.
    Date: 2006
  2. By: Yongsung Chang; Taeyoung Doh; Frank Schorfheide
    Abstract: The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long-run dynamics that are at odds with the data. Relaxing these restrictions can close the gap between DSGE models and vector autoregressions. This paper modifies a simple stochastic growth model by incorporating permanent labor supply shocks that can generate a unit root in hours worked. Using Bayesian methods the authors estimate two versions of the DSGE model: the standard specification in which hours worked are stationary and the modified version with permanent labor supply shocks. The authors find that the data support the latter specification.
    Date: 2006
  3. By: Hans Fehr; Christian Habermann
    Abstract: The present paper aims to quantify the welfare e.ects of progressive pension arrangements in Germany. Starting from a purely contribution-related benefit system, we introduce basic allowances for contributions and a flat benefit fraction. Since our overlapping-generations model takes into account variable labor supply, borrowing constraints as well as stochastic income risk, we can compare the labor supply, the liquidity, and the insurance effects of the policy reform. Our simulations indicate that for a realistic parameter combination an increase in pension progressivity would yield an aggregate effciency gain of more than 2 percent of resources. However, such a reform would not be implemented because it would not find political support of the currently living generations.
    Keywords: Pension reform; idiosyncratic labor income uncertainty.
    JEL: H55 J26
    Date: 2005–12
  4. By: Axel Börsch-Supan; Alexander Ludwig; Joachim Winter
    Abstract: Population aging and pension reform will have profound effects on international capital markets. First, demographic change alters the time path of aggregate savings within each country. Second, this process may be amplified when a pension reform shifts old-age provision towards more pre-funding. Third, while the patterns of population aging are similar in most countries, timing and initial conditions differ substantially. Hence, to the extent that capital is internationally mobile, population aging will induce capital flows between countries. All three effects influence the rate of return to capital and interact with the demand for capital in production and with labor supply. In order to quantify these effects, we develop a computational general equilibrium model. We feed this multi-country overlapping generations model with detailed long-term demographic projections for seven world regions. Our simulations indicate that capital flows from fastaging regions to the rest of the world will initially be substantial but that trends are reversed when households decumulate savings. We also conclude that closed-economy models of pension reform miss quantitatively important effects of international capital mobility.
    Keywords: aging; pension reform; capital mobility.
    JEL: E27 F21 G15 H55 J11
    Date: 2005–12
  5. By: Peng-fei Wang; Yi Wen
    Abstract: We document that "persistent and lagged" inflation (with respect to output) is a world wide phenomenon in that these short-run inflation dynamics are highly synchronized across countries. We investigate whether standard monetary models are consistent with the empirical facts. We find that neither the new Keynesian sticky-price model nor the Mankiw-Reis (QJE 2002) sticky-information model can explain the international synchronization of the short-run inflation dynamics. Although the sticky-information model of Mankiw and Reis is very successful in explaining the persistent and lagged inflation dynamics for each individual country, its open-economy analogue fails to explain the synchronization of the inflation dynamics among the countries using calibrated international covariance of monetary shocks. The reason is that the dynamic effects of monetary shocks on inflation in one country cannot be effectively propagated across and preserved in other countries. We conclude that the short-run inflation dynamics and their global synchronization cannot be a monetary phenomenon, but may be instead the consequence of non-monetary shocks. An independent contribution of the paper is to provide a simple solution technique for solving general equilibrium models with lagged expectations (e.g., due to sticky information).
    Keywords: Money ; Inflation (Finance)
    Date: 2005
  6. By: Claudio Campanale (Universidad de Alicante)
    Abstract: In this paper I present an explanation to the fact that in the data wealth is substantially more concentrated than income. Starting from the observation that the composition of households' portfolios changes towards a larger share of high-yield assets as the level of net worth increases, I first use data on historical asset returns and portfolio composition by wealth level to construct an empirical return function. I then augment the standard neoclassical growth model with idiosyncratic labor income risk and missing insurance markets to allow for returns to savings to be increasing in the level of accumulated assets. The quantitative properties of the model are examined and show that an empirically plausible difference between the return faced by poor and wealthy agents is able to generate a substantial increase in wealth inequality compared to the basic model, enough to match the Gini index of the U.S. Distribution of wealth.
    Keywords: Wealth inequality, self-insurance, portfolio composition, increasing returns
    Date: 2005–05
  7. By: Vincent Bodart; Olivier Pierrard; Henri R. Sneessens
    Abstract: RBC models with search unemployment and wage renegotiation generate too much wage volatility and too stable unemployment rate. Shimer (2004) shows that it is possible to reproduce a volatility of unemployment similar to that observed in actual economies by imposing full real wage rigidity. We use a similar model but with Calvo wage contracts. The models with full wage flexibility or full wage rigidity are obtained as particular cases. We show that a contract length of about six quarters fits best the observed cyclical properties of wages and unemployment.
    Keywords: search unemployment; Calvo wage; cyclical properties.
    JEL: E24 E32 J30 J41
    Date: 2005–12
  8. By: Shinichi Nishiyama (Georgia State University); Kent Smetters (The Wharton School, University of Pennsylvania)
    Abstract: While privatizing Social Security can improve labor supply incentives, it can also reduce risk sharing when households face uninsurable risks. We simulate a stylized 50-percent privatization using an overlapping-generations model where heterogeneous agents with elastic labor supply face idiosyncratic earnings shocks and longevity uncertainty. When wage shocks are insurable, privatization produces about $21,900 of new resources for each future household (growth adjusted over time) after all households have been fully compensated for their possible transitional losses. However, when wages are not insurable, privatization reduces efficiency by about $5,600 per future household despite improved labor supply incentives. We check the robustness of these results to different model specifications and arrive at several surprising conclusions. First, privatization actually performs relatively better in a closed economy, where interest rates decline with capital accumulation, than in an open economy where capital can be accumulated without reducing interest rates. Second, privatization also performs relatively better when an actuarially-fair private annuity market does not exist than when it does exist. Third, introducing progressivity into the privatized system to restore risk sharing must be done carefully. In particular, having the government match private contributions on a progressive basis is not very effective at restoring risk-sharing—too much matching actually harms efficiency. However, increasing the progressivity of the remaining traditional system is very effective at restoring risk sharing, thereby allowing partial privatization to produce efficiency gains of $2,700 per future household.
    Date: 2005–10
  9. By: Enrique G. Mendoza
    Abstract: This paper reports results for a class of dynamic, stochastic general equilibrium models with credit constraints that can account for some of the empirical regularities of the Sudden Stop phenomenon of recent emerging markets crises. In these models, credit constraints set in motion Irving Fisher's debt-deflation mechanism and they bind as an endogenous equilibrium outcome when agents are highly indebted. The quantitative predictions of these models yield three key lessons: (1) Sudden Stops can occur as an endogenous response to typical realizations of adverse shocks to fundamentals, in environments in which agents plan their actions taking credit constraints and expectations of Sudden Stops into account. (2) Credit constraints cause output declines during Sudden Stops when collateral constraints limit debt to a fraction of the market value of capital, when there are limits on access to working capital, or when debt-deflation lowers the value of the marginal product of factors of production. (3) The debt-deflation mechanism has significant quantitative effects in terms of the amplification, asymmetry and persistence of the responses of macroeconomic aggregates to standard shocks, and in the occurrence of Sudden Stops as infrequent events nested within regular business cycles. Precautionary saving rules out the largest Sudden Stops from the stochastic stationary state, but Sudden Stops remain a positive-probability event in the long run.
    JEL: F41 F32 E44 D52
    Date: 2006–01
  10. By: John Kennan
    Abstract: Shimer (2003) pointed out that although we have a satisfactory theory of why some workers are unemployed at any given time, we don't know why the number of unemployed workers varies so much over time. The basic Mortensen-Pissarides (1994) model does not generate nearly enough volatility in unemployment, for plausible parameter values. This paper extends the Mortensen-Pissarides model to allow for informational rents. Productivity is subject to publicly observed aggregate shocks, and to idiosyncratic shocks that are seen only by the employer. It is shown that there is a unique equilibrium, provided that the idiosyncratic shocks are not too large. The main result is that small fluctuations in productivity that are privately observed by employers can give rise to a kind of wage stickiness in equilibrium, and the informational rents associated with this stickiness are sufficient to generate relatively large unemployment fluctuations.
    JEL: E3 J6 D8
    Date: 2006–01
  11. By: Peng-fei Wang; Yi Wen
    Abstract: This paper proposes a solution method to solve linear difference models with lagged expectations. Variables with lagged expectations tend to expand the model's state space at a rate proportional to Ný, where N is the order of lagged expectations. Hence applying conventional solution methods, such as that of Blanchard and Kahn (Econometrica, 1980), to solve this type of models is not straightforward and can become very tedious, especially when N is large. Our method transforms the system with lagged expected variables into a system without lagged expected variables. Hence, the conventional solution methods can be used without the need to expand the model's state space. Examples are provided to demonstrate the usefulness of the method. We also discuss the implications of lagged expectations on the equilibrium properties of indeterminate DSGE models, such as the serial correlation properties of sunspots shocks in these models.
    Keywords: Monetary policy ; Macroeconomics
    Date: 2006
  12. By: Monique Ebell (Humboldt University of Berlin and University of Pennsylvania); Christian Haefke (CSIC, Universitat Pompeu Fabra, CREA and IZA Bonn)
    Abstract: We consider the dynamic relationship between product market entry regulation and equilibrium unemployment. The main theoretical contribution is combining a job matching model with monopolistic competition in the goods market and individual wage bargaining. Product market competition affects unemployment by two channels: the output expansion effect and a countervailing effect due to a hiring externality. Competition is then linked to barriers to entry. We calibrate the model to US data and perform a policy experiment to assess whether the decrease in trend unemployment during the 1980’s and 1990’s could be attributed to product market deregulation. Our quantitative analysis suggests that under individual bargaining, a decrease of less than two tenths of a percentage point of unemployment rates can be attributed to product market deregulation, a surprisingly small amount.
    Keywords: product market competition, barriers to entry, wage bargaining
    JEL: E24 J63 L16 O00
    Date: 2006–01
  13. By: Osang, Thomas (Department of Economics, Southern Methodist University); Sarkar, Jayanta (Department of Economics, Southern Methodist University)
    Abstract: We consider growth and welfare effects of lifetime-uncertainty in an economy with human capital-led endogenous growth. We argue that lifetime uncertainty reduces private incentives to invest in both physical and human capital. Using an overlapping generations framework with finite-lived households we analyze the relevance of government expenditure on health and education to counter such growth-reducing forces. We focus on three different models that differ with respect to the mode of financing of education: (i) both private and public spending, (ii) only public spending, and (iii) only private spending. Results show that models (i) and (iii) outperform model (ii) with respect to long-term growth rates of per capita income, welfare levels and other important macroeconomic indicators. Theoretical predictions of model rankings for these macroeconomic indicators are also supported by observed stylized facts.
    Keywords: Health, Life Expectancy, Human Capital, Public Spending, Endogenous Growth
    JEL: I1 I2 O1 H5
    Date: 2005–09–01
  14. By: Keith Sill
    Abstract: Recent empirical work documents a decline in the U.S. equity premium and a decline in the standard deviation of real output growth. The author investigates the link between aggregate risk and the asset returns in a dynamic production based asset-pricing model. When calibrated to match asset return moments, the model implies that the post-1984 reduction in TFP shock volatility of 60 percent gives rise to a 40 percent decline in the equity premium. Lower macroeconomic risk post-1984 can account for a substantial fraction of the decline in the equity premium.
    Date: 2006
  15. By: Lilia Maliar (Universidad de Alicante); Dmytro Kylymnyuk (Universidad de Alicante); Serguei Maliar (Universidad de Alicante)
    Abstract: This paper studies the implications of a dynamic general equilibrium model with three production sectors, which are agriculture, industry and services. Due to the assumption of increasing returns in industry and services, our model has multiple equilibria. Two equilibria are stable: one, in which a country produces only agricultural goods and converges to a steady state, and the other, in which a country operates all three sectors and has positive unbalanced long-run growth by contracting agriculture and expanding industry and services. These predictions agree well with the real-world development experiences of rich and poor countries. In the context of our model, we also investigate the evolution of the sectorial composition in the transition countries and find that such countries move to the rich rather than to the poor world.
    Keywords: Growth model, Increasing returns to scale, Agriculture, Industry, Services, Multiple equilibria, Transition economies
    JEL: F10 F12 O13 O30 O41
    Date: 2005–09
  16. By: Raouf Boucekkine (IRES); Blanca Martínez (Universidad de Alicante); Fernando del Río (Universidade Santiago de Compostela)
    Abstract: We construct a vintage capital à la Whelan (2002) with both exogenous embodied and disembodied technical progress, and variable utilization of each vintage. The lifetime of capital goods is endogenous and it relies on the associated operation costs. Within this model, we identify the rate of age-related depreciation and the rate of scrapping. We study the properties of the balanced growth paths of the model. First, we show that the lifetime of capital is an increasing (resp. decreasing) function of the rate of disembodied (resp. embodied) technical progress. Second, we show that both the age-related depreciation rate and the scrapping rate increase when embodied technical progress accelerates. In contrast, the latter drops when disembodied technical progress accelerates while the former remains unaffected.
    Keywords: Vintage capital, operation costs, embodied technical progress, age-related depreciation, obsolescence
    JEL: E22 E32 O40
    Date: 2005–06
  17. By: Maria Perozek
    Abstract: This paper explores how altruistic parents structure transfer rules in response to potential incentive problems and how the investment behavior of children is influenced by these transfer policies. To investigate these issues, I develop a dynamic model of altruistic transfers in which transfers can be tied to the purchase of human capital investment. Numerical solutions are examined to provide insight into the predictions of the model for transfer behavior and investment by family size. The dynamic framework developed in the paper is used to guide the interpretation of data on transfers and education investment by children in the Health and Retirement Survey. The data are consistent with the prediction of the model that children in larger families invest more in education conditional on initial transfers.
    Date: 2005

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.
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