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on Dynamic General Equilibrium |
| By: | Alejandro Justiniano; Giorgio E. Primiceri |
| Abstract: | In this paper we investigate the sources of the important shifts in the volatility of U.S. macroeconomic variables in the postwar period. To this end, we propose the estimation of DSGE models allowing for time variation in the volatility of the structural innovations. We apply our estimation strategy to a large-scale model of the business cycle and find that investment specific technology shocks account for most of the sharp decline in volatility of the last two decades. |
| JEL: | E30 C32 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12022&r=dge |
| By: | Ellen McGrattan; Edward Prescott |
| Abstract: | During the 1990s, market hours in the United States rose dramatically. The rise in hours occurred as gross domestic product (GDP) per hour was declining relative to its historical trend, an occurrence that makes this boom unique, at least for the postwar U.S. economy. We find that expensed plus sweat investment was large during this period and critical for understanding the movements in hours and productivity. Expensed investments are expenditures that increase future profits but, by national accounting rules, are treated as operating expenses rather than capital expenditures. Sweat investments are uncompensated hours in a business made with the expectation of realizing capital gains when the business goes public or is sold. Incorporating expensed and sweat equity into an otherwise standard business cycle model, we find that there was rapid technological progress during the 1990s, causing a boom in market hours and actual productivity. |
| JEL: | E3 O4 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12046&r=dge |
| By: | N. Gregory Mankiw; Ricardo Reis |
| Abstract: | This paper explores a macroeconomic model of the business cycle in which stickiness of information is pervasive. We start from a familiar benchmark classical model and add to it the assumption that there is sticky information on the part of consumers, workers, and firms. We evaluate the model against three key facts that describe short-run fluctuations: the acceleration phenomenon, the smoothness of real wages, and the gradual response of real variables to shocks. We find that pervasive stickiness is required to fit the facts. We conclude that models based on stickiness of information offer the promise of fitting the facts on business cycles while adding only one new plausible ingredient to the classical benchmark. |
| JEL: | E30 E10 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12024&r=dge |
| By: | Antonella Trigari |
| Abstract: | This paper develops a dynamic general equilibrium model that integrates labor market search and matching into an otherwise standard New Keynesian model. I allow for changes of the labor input at both the extensive and the intensive margin and develop two alternative specifications of the bargaining process. Under efficient bargaining (EB) hours are determined jointly by the firm and the worker as a part of the same Nash bargain that determines wages. With right to manage (RTM), instead, firms retain the right to set hours of work unilaterally. I show that introducing search and matching frictions affects the cyclical behavior of real marginal costs by way of two different channels: a wage channel under RTM and an extensive margin channel under EB. In both cases, the presence of search and matching frictions may cause a lower elasticity of marginal costs with respect to output and thus help to account for the observed inertia in inflation. |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:304&r=dge |
| By: | Erica X. N. Li; Dmitry Livdan; Lu Zhang |
| Abstract: | We use a fully-specified neoclassical model augmented with costly external equity as a laboratory to study the relations between stock returns and equity financing decisions. Simulations show that the model can simultaneously and in many cases quantitatively reproduce: procyclical equity issuance; the negative relation between aggregate equity share and future stock market returns; long-term underperformance following equity issuance and the positive relation of its magnitude with the volume of issuance; the mean-reverting behavior in the operating performance of issuing firms; and the positive long-term stock price drift of firms distributing cash and its positive relation with book-to-market. We conclude that systematic mispricing seems unnecessary to generate the return-related evidence often interpreted as behavioral underreaction to market timing. |
| JEL: | E13 E22 E32 E44 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12014&r=dge |
| By: | Maria Gabriela Ladu |
| Abstract: | This paper provides a structural estimation of the recent model proposed by Pissarides and Vallanti, a simplified equilibrium model which draws heavily on models with frictions and quasi-rents. The structural model is a system of three equations. The estimation method is a three-stage least squares. My empirical results find that although faster TFP growth temporarily decreases employment, most likely be- cause job destruction reacts faster to schocks than job creation does, after the first year I do not find any statistically significant effect of growth on employment. |
| Keywords: | Total Factor Productivity, Job Creation, Job De-struction, Employment |
| JEL: | E24 J64 O40 O52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:200506&r=dge |
| By: | Xavier Cuadras Morató; Xavier Mateos-Planas |
| Abstract: | A skill-biased change in technology can account at once for the changes observed in a number of important variables of the US labour market between 1970 and 1990. These include the increasing inequality in wages, both between and within education groups, and the increase in unemployment at all levels of education. In contrast, in previous literature this type of technology shock cannot account for all of these changes. The paper uses a matching model with a segmented labour market, an imperfect correlation between individual ability and education, and a fixed cost of setting up a job. The endogenous increase in overeducation is key to understand the response of unemployment to the technology shock. |
| Keywords: | Unemployment, wage premium, overeducation, SBTC |
| JEL: | E24 J31 J64 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:938&r=dge |
| By: | Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas |
| Abstract: | Three of the most important recent facts in global macroeconomics -- the sustained rise in the US current account deficit, the stubborn decline in long run real rates, and the rise in the share of US assets in global portfolio -- appear as anomalies from the perspective of conventional wisdom and models. Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) heterogeneity in these regions' capacity to generate financial assets from real investments. In extensions of the basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with the recent trends in these variables. Unlike the conventional wisdom, in the absence of a large change in (a) or (b), our model does not augur any catastrophic event. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment. |
| JEL: | E0 F3 F4 G1 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11996&r=dge |
| By: | Monika Piazzesi; Martin Schneider; Selale Tuzel |
| Abstract: | This paper considers a consumption-based asset pricing model where housing is explicitly modeled both as an asset and as a consumption good. Nonseparable preferences describe households' concern with composition risk, that is, fluctuations in the relative share of housing in their consumption basket. Since the housing share moves slowly, a concern with composition risk induces low frequency movements in stock prices that are not driven by news about cash flow. Moreover, the model predicts that the housing share can be used to forecast excess returns on stocks. We document that this indeed true in the data. The presence of composition risk also implies that the riskless rate is low which further helps the model improve on the standard CCAPM. |
| JEL: | G0 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12036&r=dge |
| By: | Michael D. Hurd; Susann Rohwedder |
| Abstract: | The simple one-good model of life-cycle consumption requires "consumption smoothing." According to previous results based on partial spending and on synthetic panels, British and U.S. households apparently reduce consumption at retirement. The reduction cannot be explained by the simple one-good life-cycle model, so it has been referred to as the retirement-consumption puzzle. An interpretation is that at retirement individuals discover they have fewer economic resources than they had anticipated prior to retirement, and as a consequence reduce consumption. This interpretation challenges the life-cycle model where consumers are assumed to be forward-looking. Using panel data, we find that prior to retirement workers anticipated on average a decline of 13.3% in spending and after retirement they recollected a decline of 12.9%: widespread surprise is not the explanation for the retirement-consumption puzzle. Workers with substantial wealth both anticipated and recollected a decline. Therefore, for many workers the decline is not necessitated by the fall in income that accompanies retirement. Poor health is associated with above-average declines. At retirement time spent in activities that could substitute for market-purchased goods increases. Apparently a number of factors contribute to the decline in spending, which, for most of the population, can be accommodated in conventional models of economic behavior. |
| JEL: | D91 J26 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12057&r=dge |
| By: | Sjaak Hurkens; Nir Vulkan |
| Abstract: | We consider a dynamic model where traders in each period are matched randomly into pairs who then bargain about the division of a fixed surplus. When agreement is reached the traders leave the market. Traders who do not come to an agreement return next period in which they will be matched again, as long as their deadline has not expired yet. New traders enter exogenously in each period. We assume that traders within a pair know each other's deadline. We define and characterize the stationary equilibrium configurations. Traders with longer deadlines fare better than traders with short deadlines. It is shown that the heterogeneity of deadlines may cause delay. It is then shown that a centralized mechanism that controls the matching protocol, but does not interfere with the bargaining, eliminates all delay. Even though this efficient centralized mechanism is not as good for traders with long deadlines, it is shown that in a model where all traders can choose which mechanism to |
| Keywords: | Bargaining, Deadlines, Markets |
| JEL: | C73 C78 |
| Date: | 2006–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:660.06&r=dge |