nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒03‒18
ten papers chosen by
Christian Zimmermann
University of Connecticut

  1. Non-stationary hours in a DSGE model By Yongsung Chang; Taeyoung Doh; Frank Schorfheide
  2. Bayesian analysis of DSGE models By Sungbae An; Frank Schorfheide
  3. Higher-order perturbation solutions to dynamic, discrete-time rational expectations models By Eric Swanson; Gary Anderson; Andrew Levin
  4. On-the-Job Search, Productivity Shocks and the Individual Earnings Process By Fabien Postel-Vinay; Hélène Turon
  5. Why did U.S. market hours boom in the 1990s? By Ellen R. McGrattan; Edward C. Prescott
  6. Increasing Returns to Saving and Wealth Inequality By Claudio Campanale
  7. Numerical Solution of Dynamic Non-Optimal Economies By Junjian Miao; Manuel Santos
  8. Macroeconomic volatility and the equity premium By Keith Sill
  9. Tax smoothing with redistribution By Iván Werning
  10. Liquidity and insurance for the unemployed By Robert Shimer; Iván Werning

  1. 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 we 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. We find that the data support the latter specification.
    Keywords: Labor supply ; Hours of labor
    Date: 2006
  2. By: Sungbae An; Frank Schorfheide
    Abstract: This paper reviews Bayesian methods that have been developed in recent years to estimate and evaluate dynamic stochastic general equilibrium (DSGE) models. We consider the estimation of linearized DSGE models, the evaluation of models based on Bayesian model checking, posterior odds comparisons, and comparisons to vector autoregressions, as well as the nonlinear estimation based on a second-order accurate model solution. These methods are applied to data generated from correctly specified and misspecified linearized DSGE models, and a DSGE model that was solved with a second-order perturbation method.
    Keywords: Macroeconomics ; Vector autoregression
    Date: 2006
  3. By: Eric Swanson; Gary Anderson; Andrew Levin
    Abstract: We present an algorithm and software routines for computing nth order Taylor series approximate solutions to dynamic, discrete-time rational expectations models around a nonstochastic steady state. The primary advantage of higher-order (as opposed to first- or second-order) approximations is that they are valid not just locally, but often globally (i.e., over nonlocal, possibly very large compact sets) in a rigorous sense that we specify. We apply our routines to compute first- through seventh-order approximate solutions to two standard macroeconomic models, a stochastic growth model and a life-cycle consumption model, and discuss the quality and global properties of these solutions.
    Keywords: Macroeconomics - Econometric models ; Business cycles ; Monetary policy
    Date: 2006
  4. By: Fabien Postel-Vinay (University of Bristol, CREST-INSEE and IZA Bonn); Hélène Turon (University of Bristol and IZA Bonn)
    Abstract: Individual labor earnings observed in worker panel data have complex, highly persistent dynamics. We investigate the capacity of a structural job search model with i.i.d. productivity shocks to replicate salient properties of these dynamics, such as the covariance structure of earnings, the evolution of individual earnings mean and variance with the duration of uninterrupted employment, or the distribution of year-to-year earnings changes. Specifically, we show within an otherwise standard job search model how the combined assumptions of on-the-job search and wage renegotiation by mutual consent act as a quantitatively plausible "internal propagation mechanism" of i.i.d. productivity shocks into persistent wage shocks. The model suggests that wage dynamics should be thought of as the outcome of a specific acceptance/rejection scheme of i.i.d. productivity shocks. This offers an alternative to the conventional linear ARMA-type approach to modelling earnings dynamics. Structural estimation of our model on a 12-year panel of highly educated British workers shows that our simple framework produces a dynamic earnings structure which is remarkably consistent with the data.
    Keywords: job search, individual shocks, structural estimation, covariance structure of earnings
    JEL: J41 J31
    Date: 2006–03
  5. By: Ellen R. McGrattan; Edward C. 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.
    Date: 2006
  6. By: Claudio Campanale (Departamento de Fundamentos del Analisis Economico, 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 ?rst use data on historical asset returns and portfolio composition by wealth level to construct an empirical return function. I then augment an Overlapping Generation version of 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 di?erence 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 and all but the top 1 percentiles of the U.S. distribution of wealth.
    Keywords: Wealth inequality, self-insurance, portfolio composition,increasing returns
    Date: 2005–11
  7. By: Junjian Miao (Department of Economics, Boston University); Manuel Santos (Department of Economics, W. P. Carey School of Business)
    Abstract: This paper presents a recursive method for the computation of sequential competitive equilibria in dynamic models with heterogeneous agents and market frictions. This computational method builds on a convergent operator defined over an expanded set of state variables for which a Markovian equilibrium solution is shown to exist. We apply this method to a stochastic growth economy and two financial economies.
    Date: 2005–01
  8. 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. We investigate 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.
    Keywords: Equity ; Macroeconomics
    Date: 2006
  9. By: Iván Werning
    Abstract: We study optimal labor and capital taxation in a dynamic economy subject to government expenditure and aggregate productivity shocks. We relax two assumptions from Ramsey models: that a representative agent exists and that taxation is proportional with no lump-sum tax. In contrast, we capture a redistributive motive for distortive taxation by allowing privately observed differences in relative skills across workers. We consider two scenarios for tax instruments: (i) taxation is linear with arbitrary intercept and slope; and (ii) taxation is non-linear and unrestricted as in Mirrleesian models. Our main result provides conditions for perfect tax smoothing: marginal taxes on labor income should remain constant over time and invariant to shocks. In addition, capital should not be taxed. We also discuss implications for optimal debt management. Finally, an extension highlights movements in the distribution of relative skills as a potential source for variations in optimal marginal tax rates.
    Date: 2005
  10. By: Robert Shimer; Iván Werning
    Abstract: We study the optimal design of unemployment insurance for workers sampling job opportunities over time. We focus on the optimal timing of benefits and the desirability of allowing workers to freely access a riskless asset. When workers have constant absolute risk aversion preferences, it is optimal to use a very simple policy: a constant benefit during unemployment, a constant tax during employment that does not depend on the duration of the spell, and free access to savings using a riskless asset. Away from this benchmark, for constant relative risk aversion preferences, the welfare gains of more elaborate policies are minuscule. Our results highlight two largely distinct roles for policy toward the unemployed: (a) ensuring workers have sufficient liquidity to smooth their consumption; and (b) providing unemployment benefits that serve as insurance against the uncertain duration of unemployment spells.
    Date: 2005

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