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on Dynamic General Equilibrium |
| By: | Christian Haefke; Michael Reiter |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:950&r=dge |
| By: | Ellen R. McGrattan |
| Abstract: | Real business cycles are recurrent fluctuations in an economy’s incomes, products, and factor inputs—especially labor—that are due to nonmonetary sources. These sources include changes in technology, tax rates and government spending, tastes, government regulation, terms of trade, and energy prices. Most real business cycle (RBC) models are variants or extensions of a neoclassical growth model. One such prototype is introduced. It is then shown how RBC theorists, applying the methodology of Kydland and Prescott (Econometrica 1982), use theory to make predictions about actual time series. Extensions of the prototype model, current issues, and open questions are also discussed. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:370&r=dge |
| By: | Pengfei Wang; Yi Wen |
| Abstract: | This paper shows that imperfect competition can lead to indeterminacy in aggregate output in a standard DSGE model that features no distortions except imperfect competition. Indeterminacy arises in the model from the composition of aggregate output. In sharp contrast to the indeterminacy literature pioneered by Benhabib and Farmer (1994) and Gali (1994), indeterminacy in our model is global (i.e., independent of the eigenvalues near the steady state); hence it is robust to parameter values of the utility function and production technologies. In addition, sunspots shocks to expectations in our model can be autocorrelated. The paper provides a justification for exogenous variations over time in desired markups, which play an important role as a source of cost-push shocks in the monetary policy literature. Our model can explain procyclical marginal cost and procyclical labor productivity simultaneously, and it outperforms a standard RBC model driven by technology shocks in explaining fluctuations in the labor market. |
| Keywords: | Prices ; Business cycles |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-017&r=dge |
| By: | Julio J. Rotemberg |
| Abstract: | This paper presents a complete general equilibrium model with flexible wages, where the degree to which wages and productivity change when cyclical employment changes is roughly consistent with postwar U.S. data. Firms with market power are assumed to bargain simultaneously with many employees, each of whom finds himself matched with a firm only after a process of search. When employment increases as a result of reductions in market power, the marginal product of labor falls. This fall tempers the bargaining power of workers and thus dampens the increase in their real wages. The procyclical movement of wages is dampened further if the posting of vacancies is subject to increasing returns. |
| Keywords: | Wages |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:06-5&r=dge |
| By: | Keiichiro Kobayashi; Masaru Inaba |
| Abstract: | The boom-bust cycles such as the episode of the "Internet bubble" in the late 1990s may be described as the business cycle driven by changes in expectations, which is called the Pigou cycle by Beaudry and Portier (An exploration into Pigou's theory of cycles, Journal of Monetary Economics, 2004). The key feature of the notion of the Pigou cycle is the comovements in the consumption, the labor, and the investment, in response to changes in expectations. We show that with the assumption that firms are subject to the collateral constraint in financing labor input (and investment), a fairly standard neoclassical model can generate the Pigou cycle. We also show that the collateral-constraint model with the private information can generate the "irrational exuberance," i.e., a boom in which each firm correctly anticipates that its own productivity will not rise, while it also believes wrongly that the productivity of the other firms will rise dramatically. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:06015&r=dge |
| By: | Paul Gomme; B. Ravikumar; Peter Rupert |
| Abstract: | Real business cycle models have difficulty replicating the volatility of S&P 500 returns. This fact should not be surprising since real business cycle theory suggests that the return to capital should be measured by the return to aggregate market capital, not stock market returns. We construct a quarterly time series of the after-tax return to business capital. Its volatility is considerably smaller than that of S&P 500 returns. Our benchmark model captures almost 40 percent of the volatility in the return to capital (relative to the volatility of output). We consider several departures from the benchmark model; the most promising is one with higher risk aversion, which captures over 60 percent of the relative volatility in the return to capital. |
| Keywords: | Business cycles ; Capital |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0603&r=dge |
| By: | Pengfei Wang; Yi Wen |
| Abstract: | This paper shows that imperfect competition can be a rich source of sunspots equilibria and coordination failures. This is demonstrated in a dynamic general equilibrium model that has no major distortions except imperfect competition. In the absence of fundamental shocks, the model has a unique certainty (fundamental) equilibrium. But there is also a continuum of stochastic (sunspots) equilibria that are not mere randomizations over fundamental equilibria. Markup is always counter-cyclical in sunspots equilibria, which is consistent with empirical evidence. The paper provides a justification for exogenous variations over time in desired markups, which play an important role as a source of cost-push shocks in the monetary policy literature. We show that fluctuations driven by self-fulfilling expectations (or sunspots) look very similar to fluctuations driven by technology shocks, and we prove that such fluctuations are welfare reducing. |
| Keywords: | Equilibrium (Economics) ; Business cycles |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-015&r=dge |
| By: | Yi Wen |
| Abstract: | This paper studies conditions under which demand-side shocks can generate realistic business cycles in RBC models. Although highly persistent demand shocks are necessary for generating procyclical investment, variable capacity utilization and habit formation can reduce the required degree of persistence. |
| Keywords: | Business cycles |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-011&r=dge |
| By: | Andres Erosa; Tatyana Koreshkova; Diego Restuccia |
| Abstract: | We develop a quantitative theory of human capital with heterogeneous agents in order to assess the sources of cross-country income differences. The cross-sectional implications of the theory and U.S. data are used to restrict the parameters of human capital technology. We then assess the model's ability to explain the cross-country data. Our quantitative model generates a total-factor-productivity (TFP) elasticity of output per worker of 2.8. This implies that a factor of 3 difference in TFP is amplified through physical and human capital accumulation to generate a factor of 20 difference in output per worker --- as observed in the data between rich and poor countries. The implied difference in TFP is in the range of estimates from micro studies. The theory suggests that using Mincer returns to measure human capital understates human capital differences across countries by a factor of 2. The cross-country differences in human capital implied by the theory are consistent with evidence from earnings of immigrants in the United States. We also find that TFP has substantial effects on cross-sectional inequality and intergenerational mobility and that public education policies can have important aggregate and distributional implications. |
| Keywords: | Human capital |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:06-02&r=dge |
| By: | Fernando Alvarez; Andrew Atkeson; Patrick J. Kehoe |
| Abstract: | Under mild assumptions, the data indicate that time-varying risk is the primary force driving nominal interest rate differentials on currency-denominated bonds. This finding is an immediate implication of the fact that exchange rates are roughly random walks. A general equilibrium monetary model with an endogenous source of risk variation—a variable degree of asset market segmentation—can produce key features of actual interest rates and exchange rates. In this model, the endogenous segmentation arises from a fixed cost for agents to exchange money for assets. As inflation varies, so does the benefit of asset market participation, and that changes the fraction of agents participating. These effects lead the risk premium to vary systematically with the level of inflation. This model produces variation in the risk premium even though the fundamental shocks have constant conditional variances. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:371&r=dge |
| By: | Martin Fukac; Adrian Pagan |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2006-10&r=dge |
| By: | Borys Grochulski; Tomasz Piskorski |
| Abstract: | We study the structure of optimal wealth and labor income taxes in a Mirrlees economy in which the productivity of labor (i.e., skill) is private, stochastic, and endogenous. Individual agents' skills are determined by their level of human capital. Human capital is not publicly observable and the returns to human capital investment are subject to idiosyncratic shocks. Preferences are not assumed to be additively separable in consumption and human capital investment and, thus, the intertemporal marginal rates of substitution of consumption are private information. We characterize the optimal allocation and a tax system that implements this allocation in equilibrium. The optimal allocation does not satisfy the "reciprocal Euler equation" of Rogerson [Econometrica, 1985], which holds in Mirrlees economies with exogenous skills. The tax system we use in our decentralization of the optimum consists of a wealth tax that is linear in wealth and a labor income tax that depends solely on labor income. The result of Kocherlakota [Econometrica, 2005], establishing the optimality of zero expected marginal wealth tax rate, holds in our model. We show that endogenous skill determination affects the volatility of marginal wealth taxes rather than their expectation. Relative to economies with exogenous skills, the optimal marginal wealth tax rate is more volatile in our endogenous skill economy. Also, we demonstrate the optimality of a wedge in the returns on the two assets present in our economy: At the optimum, the marginal return on human capital investment is strictly larger than the marginal return on physical capital investment. |
| Keywords: | Human capital ; Wealth |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:05-13&r=dge |
| By: | Marco Battaglini; Stephen Coate |
| Abstract: | This paper presents a dynamic political economy theory of public spending, taxation and debt. Policy choices are made by a legislature consisting of representatives elected by geographically-defined districts. The legislature can raise revenues via a distortionary income tax and by borrowing. These revenues can be used to finance a national public good and district-specific transfers (interpreted as pork-barrel spending). The value of the public good is stochastic, reflecting shocks such as wars or natural disasters. In equilibrium, policy-making cycles between two distinct regimes: “business-as-usual” in which legislators bargain over the allocation of pork, and “responsible-policy-making” in which policies maximize the collective good. Transitions between the two regimes are brought about by shocks in the value of the public good. In the long run, equilibrium tax rates are too high and too volatile, public good provision is too low and debt levels are too high. In some environments, a balanced budget requirement can improve citizen welfare. |
| JEL: | H6 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12100&r=dge |
| By: | Andrea Raffo |
| Abstract: | Conventional two-country RBC models interpret countercyclical net exports as reflecting, in large part, the dynamics of capital. I show that, quantitatively, theoretical economies rely on counterfactual terms of trade effects: trade fluctuations, on the contrary, are driven primarily by consumption smoothing, thus generating procyclical net trade in goods. I then consider a class of preferences that embeds home production in a reduced form: consumption volatility increases so that countercyclical net exports reflect primarily a strong relation between income and imports, as in the data. The major discrepancy between theory and data concerns the variability of international prices. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp06-01&r=dge |
| By: | Ayse Imrohoroglu; Antonio Merlo; Peter Rupert |
| Abstract: | In this paper, we use an overlapping generations model where individuals are allowed to engage in both legitimate market activities and criminal behavior in order to assess the role of certain factors on the property crime rate. In particular, we investigate if any of the following could be capable of generating the large differences in crime rates that are observed across countries: differences in the unemployment rate, the fraction of low-human-capital individuals in an economy, the probability of apprehension, the duration of jail sentences, and income inequality. We find that small differences in the probability of apprehension and in income inequality can generate quantitatively significant differences in the crime rates across similar environments. |
| Keywords: | Crime |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0602&r=dge |
| By: | K.K.Tang (MRG - School of Economics, The University of Queensland); Jie Zhang (MRG - School of Economics, The University of Queensland) |
| Abstract: | This paper studies investment in health and education in a life-cycle model. Health investment enhances survival to old age by improving health from its endowed level. The model predicts two distinctive phases of development. When income is low enough, the economy has no health investment and little savings, leading to slow growth. When income grows, health investment will become positive and the saving rate will rise, leading to higher life expectancy and faster growth. A health subsidy can move the economy from the first phase to the next. Subsidies on health and education investments can improve welfare. |
| URL: | http://d.repec.org/n?u=RePEc:qld:uqmrg6:06&r=dge |
| By: | Richard Pierse (University of Surrey) |
| Abstract: | In this paper we show how the popular L-B-J algorithm for solving forward-looking economic models using Newton methods can be gen- eralised to allow for a block of terminal equations for variables that appear with a lead. The e¤ect of choosing di¤erent types of termi- nal condition is explored in a simple stochastic growth model using WinSolve, a general nonlinear model solution package. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1006&r=dge |
| By: | Richard Pierse (University of Surrey) |
| Abstract: | In this paper we propose an algorithm for the solution of optimal control problems with nonlinear models based on a generalised Gauss- Newton algorithm but making use of analytic model derivatives. The method is implemented in WinSolve, a general nonlinear model solu- tion program. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0906&r=dge |