nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒02‒12
ten papers chosen by
Christian Zimmermann
University of Connecticut

  1. DSGE Models of High Exchange-Rate Volatility and Low Pass-Through By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  2. A Dynamic Theory of Public Spending, Taxation and Debt By Marco Battaglini; Steve Coate
  3. Employment Protection, Product Market Regulation and Firm Selection By Winfried Koeniger; Julien Prat
  4. Bank interest rate pass-through in the euro area: a cross country comparison By Florin Ovidiu Bilbiie; André Meier; Gernot J. Müller
  5. Numerical computation for initial value problems in economics By Óscar Afonso; Paulo B. Vasconcelos
  6. Competition, Innovation and Growth with Limited Commitment By Ramon Marimon; Vincenzo Quadrini
  7. Empirical Comparison of Sticky Price and Sticky Information Models By Oleg Korenok
  8. Patience Capital and the Demise of the Aristocracy By Doepke, Matthias; Zilibotti, Fabrizio
  9. Back to Square One: Identification Issues in DSGE Models By Fabio Canova; Luca Sala
  10. On the Covariance Structure of Changes in Consumption in the Health and Retirement Study By Michael Perry

  1. By: Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
    Abstract: This paper develops a quantitative, dynamic, open-economy model which endogenously generates high exchange rate volatility, whereas a low degree of pass-through stems from both nominal rigidities (in the form of local currency pricing) and price discrimination. We model real exchange rate volatility in response to real shocks by reconsidering and extending two approaches suggested by the quantitative literature (one by Backus Kehoe and Kydland [1995], the other by Chari, Kehoe and McGrattan [2003]), within a common framework with incomplete markets and segmented domestic economies. Our model accounts for a variable degree of ERPT over different horizons. In the short run, we find that a very small amount of nominal rigidities - consistent with the evidence in Bils and Klenow [2004] - lowers the elasticity of import prices at border and consumer level to 27% and 13%, respectively. Remarkably, exchange rate depreciation worsens the terms of trade - in accord to the evidence stressed by Obstfeld and Rogo [2000]. In the long run, exchange-rate pass-through coefficients are also below one, as a result of price discrimination. The latter is an implication of distribution services, which makes the goods demand elasticity market specific.
    Keywords: international business cycle, exchange rate volatility, pass-through, international transmission, DSGE models
    JEL: F33 F41
    Date: 2005
  2. By: Marco Battaglini; Steve Coate
    Date: 2006–01–28
  3. By: Winfried Koeniger (IZA Bonn and University of Bonn); Julien Prat (University of Vienna and IZA Bonn)
    Abstract: This paper analyzes the effect of labor and product market regulation in a dynamic stochastic equilibrium with search frictions. Modeling multiple-worker firms allows us to distinguish between the exit-and-entry (extensive) margin, and the hiring-and-firing (intensive) margin. We characterize analytically how both margins depend on regulation before we calibrate the model to the US economy. We find that firing costs matter most for the intensive margin. Fixed or set-up costs in the product market instead alter primarily the behavior of firms at the extensive margin. Moreover, we find important interactions between the policies through firm selection. Finally, the opposite effect of product and labor market regulation on job turnover rationalizes the empirically observed similarity of turnover rates across countries.
    Keywords: firing cost, product market regulation, firm selection, firm turnover, job turnover
    JEL: E24 J63 J64 J65
    Date: 2006–02
  4. By: Florin Ovidiu Bilbiie (Nuffield College, New Road, OX1 1NF, Oxford, United Kingdom.); André Meier (International Monetary Fund, 700 19th Street NW, Washington, DC 20431, USA.); Gernot J. Müller (Goethe University Frankfurt, Department of Economics, Mertonstrasse 17, D-60325 Frankfurt am Main, Germany)
    Abstract: Using vector autoregressions on U.S. time series for 1957-1979 and 1983-2004, we find government spending shocks to have stronger e¤ects on output, consumption, and wages in the earlier sample. We try to account for this observation within a DSGE model featuring price rigidities and limited asset market participation. Speci?cally, we estimate the structural parameters of the model for both samples by matching impulse responses. Model-based counterfactual experiments suggest that increased asset market participation accounts for some of the changes in fiscal transmission. However, the key quantitative factor appears to be the more active monetary policy of the Volcker-Greenspan period.
    Keywords: Government Spending; Asset Market Participation; Fiscal Policy; Monetary Policy; DSGE; Vector Autoregression; Minimum Distance Estimation
    JEL: E21 E62 E63
    Date: 2006–01
  5. By: Óscar Afonso (CEMPRE, Faculdade de Economia, Universidade do Porto); Paulo B. Vasconcelos (Faculdade de Economia, Universidade do Porto)
    Abstract: We summarise Runge-Kutta type methods for the solution of ordinary differential equations in models of economic dynamics. In this work we are going to present explicit Runge-Kutta type methods, a family of methods to solve numerically systems of ordinary differential equations, without the need to evaluate high-order derivatives. We apply this numerical approach to solve a dynamic, general equilibrium growth model of North-South technological-knowledge diffusion by imitation.
    Keywords: North-South; Technological Knowledge Diffusion; Convergence; Numerical Computations
    JEL: C63 O31 O33 O47
    Date: 2006–02
  6. By: Ramon Marimon; Vincenzo Quadrini
    Abstract: We study how barriers to business start-up affect the investment in knowledge capital when contracts are not enforceable. Barriers to business start-up lower the competition for knowledge capital and, in absence of commitment, reduce the incentive to accumulate knowledge. As a result, countries with large barriers experience lower income and growth. Our results are consistent with cross-country evidence showing that the cost of business start-up is negatively correlated with the level and growth of income.
    Keywords: Innovation, Knowledge Capital, Enforcement, Growth, Competition, Commitment, Recursive Contracts, Mobility
    JEL: O30 O31 O40 J24 E22 D23
    Date: 2005–12
  7. By: Oleg Korenok (Department of Economics, VCU School of Business)
    Abstract: Mankiw and Reis (2002) have revived imperfect information explanations for the short run real effects of monetary policy. This paper contrasts their sticky information model with the standard sticky price model. First, I utilize a theoretical relation between aggregate prices and unit labor cost that allows me to leave unspecified household preferences, wage setting and money demand. Second, I introduce a modeling approach that allows me to nest the sticky price and the sticky information models within a single empirical framework. Third, I propose a single-step estimation method that provides consistent estimates of adjustment speeds and reliable confidence bands that enable me to reject flexible prices. Finally, I use the approach to carry out an empirical specification analysis of multiple structural models. An empirical comparison favors the sticky price explanation over the Mankiw-Reis model.
    Keywords: sticky price, sticky information, model selection
    JEL: E12 E3 C32
    Date: 2004–11
  8. By: Doepke, Matthias (University of California, Los Angeles); Zilibotti, Fabrizio (Institute for International Economic Studies, Stockholm University)
    Abstract: We model the decision problem of a parent who chooses an occupation and invests in the patience of her children. The two choices complement each other: patient individuals choose occupations with a steep income profile; a steep income profile, in turn, leads to a strong incentive to invest in patience. In equilibrium, society becomes stratified along occupational lines. The most patient people are those in occupations requiring the most education and experience. The theory can account for the demise of the British land-owning aristocracy in the nineteenth century, when rich landowners proved unable to profit from new opportunities arising with industrialization, and were thus surpassed by industrialists rising from the middle classes.
    Keywords: discount factor; patience; British aristocracy; Industrial Revolution; capital accumulation; income distribution
    JEL: N23 O14 O15 Z10
    Date: 2005–04–01
  9. By: Fabio Canova; Luca Sala
    Abstract: We investigate identifiability issues in DSGE models and their consequences for parameter estimation and model evaluation when the objective function measures the distance between estimated and model impulse responses. We show that observational equivalence, partial and weak identification problems are widespread,that they lead to biased estimates, unreliable t-statistics and may induce investigators to select false models. We examine whether different objective functions affect identification and study how small samples interact with parameters and shock identification. We provide diagnostics and tests to detect identification failures and apply them to a state-of-the-art model.
  10. By: Michael Perry (University of Michigan)
    Abstract: Using generalized method of moments on the covariance matrix, I test three models of consumption change on constructed consumption data from the Health and Retirement Study. Meant as a first step towards estimating life-cycle effects of subjective survival probabilities on consumption profiles, this study finds that the model that best describes the consumption data is a pure measurement error model. This is likely due to the large amount of error introduced in the process of inferring consumption from other financial data. This result casts significant doubt on the use of this data in estimating a life-cycle model.
    Date: 2006–01

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