nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒03‒11
fourteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Why Have Business Cycle Fluctuations Become Less Volatile? By Andres Arias; Gary D. Hansen; Lee E. Ohanian
  2. I - Q Cycles By Patrick Francois; Huw Lloyd-Ellis
  3. "The Adjusted Solow Residual and Asset Returns" By Jeong-Joon Lee
  4. Welfare Improvement from Restricting the Liquidity of Nominal Bonds By Shouyong Shi
  5. A Quantitative Theory of the Gender Gap in Wages By Andrés Erosa; Luisa Fuster; Diego Restuccia
  6. A Microfoundation of Monetary Economics By Shouyong Shi
  7. Schumpeterian Restructuring By Patrick Francois; Huw Lloyd-Ellis
  8. The Depressing Effect of Agricultural Institutions on the Prewar Japanese Economy By Fumio Hayashi; Edward C. Prescott
  9. The Interaction between Retirement and Job Search: A Global Approach to Older Workers Employment By Jean-Olivier Hairault; François Langot; Thepthida Sopraseuth
  10. "A Comparison of the Japanese and U.S. Business Cycles" By R. Anton Braun; Julen Esteban-Pretel; Toshihiro Okada; Nao Sudou
  11. The retirement-consumption puzzle and involuntary early retirement: Evidence from the British Household Panel Survey By Sarah Smith
  12. A General Equilibrium Analysis of Parental Leave Policies By Andrés Erosa; Luisa Fuster; Diego Restuccia
  13. On Capital Market Imperfections as a Source of Low TFP and Economic Rents By Andres Erosa; Ana Hidalgo
  14. Early Retirement Behaviour in the Netherlands: Evidence from a Policy Reform By Rob Euwals; Daniel van Vuuren; Ronald Wolthoff

  1. By: Andres Arias; Gary D. Hansen; Lee E. Ohanian
    Abstract: This paper shows that a standard Real Business Cycle model driven by productivity shocks can successfully account for the 50 percent decline in cyclical volatility of output and its components, and labor input that has occurred since 1983. The model is successful because the volatility of productivity shocks has also declined significantly over the same time period. We then investigate whether the decline in the volatility of the Solow Residual is due to changes in the volatility of some other shock operating through a channel that is absent in the standard model. We therefore develop a model with variable capacity and labor utilization. We investigate whether government spending shocks, shocks that affect the household's first order condition for labor, and shocks that affect the household's first order condition for saving can plausibly account for the change in TFP volatility and in the volatility of output, its components, and labor. We find that none of these shocks are able to do this. This suggests that successfully accounting for the post-1983 decline in business cycle volatility requires a change in the volatility of a productivity-like shock operating within a standard growth model.
    JEL: E3
    Date: 2006–03
  2. By: Patrick Francois (University of British Columbia); Huw Lloyd-Ellis (Queen's University)
    Abstract: We develop a model of "intrinsic" business cycles, driven by the decentralized behaviour of entrepreneurs and firms making continuous, divisible improvements in their productivity. We show how equilibrium cycles, associated with strategic delays in implementation and endogenous innovation, arise even in the presence of reversible investment. We derive the implications for the cyclical evolution of both tangible (physical) and intangible (knowledge) capital. In particular, our framework is consistent with key aspects of the somewhat puzzling relationship between fixed capital formation and the stockmarket at business cycle frequencies.
    Keywords: Tobin\'s Q, fixed capital formation, intangible investment, cycles and growth
    JEL: E0 E3 O3 O4
    Date: 2005–10
  3. By: Jeong-Joon Lee (Towson University)
    Abstract: The purpose of this study is to examine the effects of a measured aggregate productivity shock on asset returns. To achieve this, a simple equilibrium business cycle model is presented to show that an aggregate productivity shock can be identified as a factor affecting asset returns. The paper uses the Solow residual to measure productivity changes, but deviates from standard practice by incorporating variations in capital utilization rates. The paper first develops the theoretical link between productivity shocks and asset returns with no adjustment costs, and then tests that link with the two measures of productivity, the Solow residual with and without variation in capital utilization. Results based on U.S post-war data show significant differences in the dynamic impacts of these two measures of productivity. The VAR evidence suggests that technology changes, measured with variation in capital utilization, have a delayed impact on asset returns, a distinct finding. Finally, policy implications of the findings are discussed.
    Date: 2006–01
  4. By: Shouyong Shi
    Abstract: In this paper I examine whether a society can improve welfare by imposing a legal restriction to forbid the use of nominal bonds as a means of payments for goods. To do so, I integrate a microfounded model of money with the framework of limited participation. While the asset market is Walrasian, the goods market is decentralized and the legal restriction is imposed only in a fraction of the trades. I show that the legal restriction can improve the society's welfare. In contrast to the literature, this essential role of the legal restriction persists even in the steady state and it does not rely on households' ability to trade unmatured bonds for money after observing the taste (or endowment) shocks.
    JEL: E40
  5. By: Andrés Erosa; Luisa Fuster; Diego Restuccia
    Abstract: Using panel data from the National Longitudinal Survey of Youth (NLSY), we document that gender differences in wages almost double during the first 20 years of labor market experience and that there are substantial gender differences in employment and hours of work during the life cycle. A large portion of gender differences in labor market attachment can be traced to the impact of children on the labor supply of women. We develop a quantitative life-cycle model of fertility, labor supply, and human capital accumulation decisions. We use this model to assess the role of fertility on gender differences in labor supply and wages over the life cycle. In our model, fertility lowers the lifetime intensity of market activity, reducing the incentives for human capital accumulation and wage growth over the life cycle of females relative to males. We calibrate the model to panel data of men and to fertility and child related labor market histories of women. We find that fertility accounts for most of the gender differences in labor supply and wages during the life cycle documented in the NLSY data.
    Keywords: Gender wage gap, employment, experience, fertility, human capital
    JEL: J2 J3
  6. By: Shouyong Shi
    Abstract: In this lecture, I explain what the microfoundations of money are about and why they are necessary for monetary economics. Then, I review recent developments of a particular microfoundation of money, commonly known as the search theory of money. Finally, I outline some unresolved issues.
    JEL: E40 E50 E31
  7. By: Patrick Francois (University of British Columbia); Huw Lloyd-Ellis (Queen's University)
    Abstract: We develop a Shumpeterian theory of business cycles that relates job creation, job destruction and wages over the cycle to the processes of firm restructuring, innovation and implementation that drive long-run growth. Due to incentive problems, production workers are employed via relational contracts and experience involuntary unemployment. Job destruction and firm turnover are counter-cyclical, but labour productivity growth and job creation are pro-cyclical. Endogenous fluctuations in job creation on the intensive margin are the dominant source of changes in employment growth. Our framework also highlights the counter-cyclical forces on wages due to restructuring, and illustrates the relationship between the cyclicality of wages and long-run productivity growth. 052<p type="texpara" tag="Body Text" et="abstract" >
    Keywords: Intrinsic business cycles, job creation and destruction, innovation, wage cyclicality
    JEL: E0 E3 O3 O4
    Date: 2005–07
  8. By: Fumio Hayashi; Edward C. Prescott
    Abstract: The question we address in this paper is why the Japanese miracle didn't take place until after World War II. For much of the pre-WWII period, Japan's real GNP per worker was not much more than a third of that of the U.S., with falling capital intensity. We argue that its major cause is a barrier that kept agricultural employment constant at about 14 million throughout the prewar period. In our two-sector neoclassical growth model, the barrier-induced sectoral mis-allocation of labor and a resulting disincentive for capital accumulation account well for the depressed output level. Were it not for the barrier, Japan's prewar GNP per worker would have been close to a half of the U.S. The labor barrier existed because, we argue, the prewar patriarchy, armed with paternalistic clauses in the prewar Civil Code, forced the son designated as heir to stay in agriculture.
    JEL: E1 O1 O4 N3
    Date: 2006–03
  9. By: Jean-Olivier Hairault (EUREQUA, CEPREMAP, University of Paris I and IZA Bonn); François Langot (PSE-Jourdan, CEPREMAP and GAINS, University of Maine); Thepthida Sopraseuth (PSE-Jourdan, CEPREMAP and EPEE, University of Evry)
    Abstract: This paper presents a theoretical foundation and empirical evidence in favor of the view that the tax on continued activity not only decreases the participation rate by inducing early retirement, but also badly affects the employment rate of older workers just before early retirement age. Countries with an early retirement age at 60 also have lower employment rates for old workers aged 55-59. Based on the French Labor Force Survey, we show that the likelihood of employment is significantly affected by the distance from retirement, in addition to age and other relevant variables. We then extend McCall's (1970) job search model by explicitly integrating life-cycle features and retirement decisions. Using simulations, we show that the effective tax on continued activity caused by French social security system in conjunction with the generosity of unemployment benefits for older workers helps explain the low rate of employment just before the early retirement age. Decreasing this tax, thus bringing it closer to the actuarially-fair scheme, not only extends the retirement age, but also encourages a more intensive job-search by older unemployed workers.
    Keywords: retirement, old workers, search, actuarial fairness
    JEL: J22 J26 H31
    Date: 2006–02
  10. By: R. Anton Braun (Faculty of Economics, University of Tokyo); Julen Esteban-Pretel (Faculty of Economics, University of Tokyo); Toshihiro Okada (School of Economics, Kwansei Gakuin University); Nao Sudou (Bank of Japan and Boston University)
    Abstract: The paper constructs a consistent set of quarterly Japanese data for the 1960-2002 sample period and compares properties of the Japanese and U.S. business cycles. We document some important differences in the adjustment of labor input between the two countries. In Japan most most of the adjustment is in hours per worker of males and females and also in employment of female. In the U.S. most of the adjustment is in employment of both males and females. We formulate, estimate and analyze a model that makes distinction between the intensive and extensive margin and allows for gender differences in labor supply. A weak empirical correlation between hours per worker and employment in Japanese data is a puzzle for our theory.
    Date: 2005–12
  11. By: Sarah Smith
    Abstract: This paper uses data from the British Household Panel Survey (BHPS) to shed further light on the fall in consumption at retirement (the “retirement-consumption puzzle”). Comparing food spending of men retiring involuntarily early (through ill health or redundancy) with spending of men who retire voluntarily, it finds a significant fall in spending only for those who retire involuntarily. This is consistent with the observed fall in spending being linked to a negative wealth shock for some retirees.
    Keywords: Retirement, life-cycle model of consumption and saving.
    JEL: D91 J26
    Date: 2006–01
  12. By: Andrés Erosa; Luisa Fuster; Diego Restuccia
    Abstract: An important feature of the U.S. labor market is that, even after controlling for measurable differences in education and experience, the average wage of women with children is 89 percent of the average wage of women without children. This ``family gap\\\" in wages accounts for almost half the gender gap in wages. Proponents of mandatory-leave policies argue that career interruptions associated with fertility have long-lasting effects on female employment and are costly in terms of human-capital losses for females. Despite the fact that mandatory leaves are widely applied in developed countries, their effects on the economy are not well understood. We develop and calibrate a general-equilibrium model of fertility and labor-market decisions to study the quantitative impact of such policies. We build on the Mortensen and Pissarides (1994) labor-market framework by introducing male and female workers, general and specific human-capital accumulation on the job, and temporary separations between the worker and a job. We find that: ($i$) the loss of specific human capital accounts for a small fraction of the wage gaps and ($ii$) mandatory-leave policies have substantial aggregate and redistributive effects on fertility, employment, and welfare. Interestingly, we find that the general-equilibrium effect of mandatory-leave policies is a reduction in the amount of time females spend at home with children.
    Keywords: Parental leaves, fertility, specific human capital, temporary separations.
    JEL: J2 J3
  13. By: Andres Erosa; Ana Hidalgo
    Abstract: We propose a theory in which capital market imperfections are at the origin of cross-country TFP differences. In our theory entrepreneurs have private information about the multifactor productivity of their technology. We study how the contracting environment, as described by the ability to enforce contracts, affects the provision of incentives and resource allocation to and across entrepreneurs. Our theory implies that countries with a low ability to enforce contracts use inefficient technologies in equilibrium and are characterized by differences in productivity across industries. These implications of our theory are supported by the empirical evidence. Our theory also suggests that entrepreneurs have a vested interest in maintaining a status quo with low enforcement since it allows them to extract rents from the factor services they hire.
    JEL: O40 J24 D24
  14. By: Rob Euwals (CPB Netherlands Bureau for Economic Policy Analysis, CEPR and IZA Bonn); Daniel van Vuuren (CPB Netherlands Bureau for Economic Policy Analysis and Free University of Amsterdam); Ronald Wolthoff (Free University of Amsterdam and Tinbergen Institute)
    Abstract: In the early 1990s, the Dutch social partners agreed upon transforming the generous and actuarially unfair PAYG early retirement schemes into less generous and actuarially fair capital funded schemes. The starting dates of the transitional arrangements varied by industry sector. In this study, we exploit the variation in starting dates to estimate the causal impact of the policy reform on early retirement behaviour. We use a large administrative dataset, the Dutch Income Panel 1989-2000, to estimate hazard rate models for early retirement. We conclude that the policy reform induced workers to postpone early retirement. In particular, both the price effect (reducing implicit taxes) and the wealth effect (reducing early retirement wealth) are shown to have a positive impact on the early retirement age. Yet, we show that model specifications including the most commonly used financial incentive measures are open to further improvements, given that these are outperformed by a simple specification with dummy variables.
    Keywords: early retirement, intertemporal choice, duration analysis
    JEL: C41 D91 J26
    Date: 2006–03

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