nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒03‒25
eleven papers chosen by
Christian Zimmermann
University of Connecticut

  1. On-the-job Search, Productivity Shocks, and the Individual Earnings Process By Fabien Postel-Vinay; Hélène Turon
  2. Endogenous Labor Market Participation and the Business Cycle By Christian Haefke; Michael Reiter
  3. Lots of Heterogeneity in a Matching Model By Aaron Schiff; Martin Browning; John Kennes
  4. A Dynamic Model of Settlement By Thorsten Koeppl; Cyril Monnet; Ted Temzelides
  5. One Sector Models, Indeterminacy, and Productive Public Spending By Sergey Slobodyan
  6. Complementarities and substitutabilities in matching models By Gabriele, CARDULLO
  7. Optimal Dynamic Risk Sharing when Enforcement is a Decision Variable By Thorsten Koeppl
  8. Why Are Capital Income Taxes So High? By Floden, Martin
  9. Rethinking the Concept of Long-Run Economic Growth By Christian Groth; Karl-Josef Koch; Thomas M. Steger
  10. Robustifying learnability By Robert J. Tetlow; Peter von zur Muehlen
  11. Continuous State Dynamic Programming via Nonexpansive Approximation By John Stachurski

  1. By: Fabien Postel-Vinay; Hélène Turon
    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: 2006–02
  2. By: Christian Haefke (Instituto de Análisis Económico, CSIC and IZA Bonn); Michael Reiter (Universitat Pompeu Fabra)
    Abstract: Existing models of equilibrium unemployment with endogenous labor market participation are complex, generate procyclical unemployment rates and cannot match unemployment variability relative to GDP. We embed endogenous participation in a simple, tractable job market matching model, show analytically how variations in the participation rate are driven by the cross-sectional density of home productivity near the participation threshold, and how this density translates into an extensive-margin labor supply elasticity. A calibration of the model to macro data not only matches employment and participation variabilities but also generates strongly countercyclical unemployment rates. With some wage rigidity the model also matches unemployment variations well. Furthermore, the labor supply elasticity implied by our calibration is consistent with microeconometric evidence for the US.
    Keywords: matching models, labor market participation, labor supply elasticity, time aggregation
    JEL: E24 E32 J21 J64
    Date: 2006–03
  3. By: Aaron Schiff; Martin Browning (Institute of Economics University of Copenhagen); John Kennes
    JEL: J64
    Date: 2005
  4. By: Thorsten Koeppl (Department of Economics, Queen's University); Cyril Monnet (DG Research, European Central Bank); Ted Temzelides (Department of Economics, University of Pittsburgh)
    Abstract: We investigate the role of settlement in a dynamic model of a payment system where the ability of participants to perform certain welfare-improving transactions is subject to random and unobservable shocks. In the absence of settlement, the full information first-best allocation cannot be supported due to incentive constraints. In contrast, this allocation is supportable if settlement is introduced. This, however, requires that settlement takes place with a sufficiently high frequency.
    Keywords: Payment Systems, Settlement, Mechanism Design
    JEL: E40 D82 C73
    Date: 2006–02
  5. By: Sergey Slobodyan
    Abstract: This paper studies the influence of different modelling assumptions on the determinacy of the steady state in one—sector models of economic growth with externalities in the production function. We show that productive public spending subject to congestion, combined with variable capital utilization, can lead to indeterminacy at very low degrees of social increasing returns to scale. We perform a calibration of the model to the tax regimes observed in the USA. We shed some light on the conflicting effects of progressive taxation on the steady state stability reported in the literature. Finally, we extensively discuss the features of the model that lead to an indeterminate rather than an explosive steady state once the saddle—path stability is broken.
    Keywords: indeterminacy, absolute instability, productive public spending, progressive taxation.
    JEL: E32 E62 H41
    Date: 2006–03
  6. By: Gabriele, CARDULLO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper describes an equilibrium matching model with two types of workers producing two different intermediate goods. Labour markets are perfectly segmented, but productive complementarities between sectors and productive substitutability within sectors arise. This deeply changes the effects of labour market policies. A welfare analysis is also conducted. Under constant returns to scale in the matcing technology, the so-called Hosios condition is sufficient to guarantee the efficiency of the decentralized equilibrium.
    Date: 2005–12–04
  7. By: Thorsten Koeppl (Department of Economics, Queen's University)
    Abstract: Societies provide institutions that are costly to set up, but able to enforce long-run relationships. We study the optimal decision problem of using self-governance for risk sharing or governance through enforcement provided by these institutions. Third-party enforcement is modelled as a costly technology that consumes resources, but permits the punishment of agents who deviate from ex-ante specified allocations. We show that it is optimal to employ the technology whenever commitment problems prevent first-best risk sharing, but never optimal to provide incentives exclusively via this technology. Commitment problems then persist and the optimal incentive structure changes dynamically over time with third-party enforcement monotonically increasing in the relative inequality between agents.
    Keywords: Limited Commitment, Risk Sharing, Third-party Enforcement
    JEL: C73 D60 D91 K49
    Date: 2005–01
  8. By: Floden, Martin (Dept. of Economic Statistics, Stockholm School of Economics)
    Abstract: The Ramsey optimal taxation theory implies that the tax rate on capital income should be zero in the long run. This result holds even if the social planner only cares about workers that do not hold assets, or if the planner only cares about any other group in the economy. This paper demonstrates that although all households agree that capital income taxation should be eliminated in the long run, they do not agree on how to eliminate these taxes. Wealthy households would prefer a reform that is funded mostly by higher taxes on labor income while households with little wealth would prefer a reform that is funded mostly by high taxes on initial wealth. Pareto improving reforms typically exist, but the welfare gains of such reforms are modest.
    Keywords: optimal taxation; inequality; redistribution
    JEL: E60 H21
    Date: 2006–03–08
  9. By: Christian Groth (Department of Economics, University of Copenhagen); Karl-Josef Koch (Siegen University); Thomas M. Steger (ETH Zürich)
    Abstract: This paper argues that growth theory needs a more general “regularity” concept than that of exponential growth. This opens up for considering a richer set of parameter combinations than in standard growth models. Allowing zero population growth in the Jones (1995) model serves as our illustration of the usefulness of a general concept of “regular growth”.
    Keywords: exponential growth; arithmetic growth; regular growth; semi-endogenous growth; knife-edge restrictions
    JEL: O31 O40 O41
    Date: 2006–03
  10. By: Robert J. Tetlow (Federal Reserve Board, 20th and C Streets, NW, Washington, D.C. 20551, USA.); Peter von zur Muehlen (von zur Muehlen & Associates, Vienna, VA 22181, USA.)
    Abstract: In recent years, the learnability of rational expectations equilibria (REE) and determinacy of economic structures have rightfully joined the usual performance criteria among the sought-after goals of policy design. Some contributions to the literature, including Bullard and Mitra (2001) and Evans and Honkapohja (2002), have made significant headway in establishing certain features of monetary policy rules that facilitate learning. However a treatment of policy design for learnability in worlds where agents have potentially misspecified their learning models has yet to surface. This paper provides such a treatment. We begin with the notion that because the profession has yet to settle on a consensus model of the economy, it is unreasonable to expect private agents to have collective rational expectations. We assume that agents have only an approximate understanding of the workings of the economy and that their learning the reduced forms of the economy is subject to potentially destabilizing perturbations. The issue is then whether a central bank can design policy to account for perturbations and still assure the learnability of the model. Our test case is the standard New Keynesian business cycle model. For different parameterizations of a given policy rule, we use structured singular value analysis (from robust control theory) to find the largest ranges of misspecifications that can be tolerated in a learning model without compromising convergence to an REE. In addition, we study the cost, in terms of performance in the steady state of a central bank that acts to robustify learnability on the transition path to REE.
    Keywords: monetary policy; learning, E-stability; learnability; robust control.
    JEL: C6 E5
    Date: 2006–02
  11. By: John Stachurski
    Abstract: This paper studies fitted value iteration for continuous state dynamic programming using nonexpansive function approximators. A number of nonexpansive approximation schemes are discussed. The main contribution is to provide error bounds for approximate optimal policies generated by the value iteration algorithm.
    Keywords: Dynamic Programming; Approximation
    JEL: C63 C61
    Date: 2006

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