nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒04‒22
eleven papers chosen by
Christian Zimmermann
University of Connecticut

  1. Optimal Accumulation in an Endogenous Growth Setting with Human Capital By Frédéric Docquier; Oliver Paddison; Pierre Pestieau
  2. Does Neoclassical Theory Account for the Effects of Big Fiscal Shocks? Evidence From World War II By Ellen R. McGrattan; Lee E. Ohanian
  3. Job and Wage Mobility in a Search Model with Non-Compliance (Exemptions) with the Minimum Wage By Zvi Eckstein; Suqin Ge; Barbara Petrongolo
  4. Savings Accounts and the Life-Cycle Approach to Social Insurance By Peter Birch Sørensen; Martin Ino Hansen; A. Lans Bovenberg
  5. Employment Subsidies and Substitutable Skills: An Equilibrium Matching Approach By Gabriele Cardullo; Bruno Van der Linden
  6. Simultaneous Search with Heterogeneous Firms and Ex Post Competition By Pieter A. Gautier; Ronald P. Wolthoff
  7. Creation-Date: 2006-03 By Arjan Lejour; Paul Veenendaal; Gerard Verweij; Nico van Leeuwen
  8. Starving the Beast? Intra-Generational Conflict and Balanced Budget Rules By Dirk Niepelt
  9. How Far Are We From The Slippery Slope? The Laffer Curve Revisited By Mathias Trabandt; Harald Uhlig
  10. Unexploited connections between intra- and inter-temporal allocation By Thomas Crossley; Hamish Low
  11. Output fluctuations persistence: Do cyclical shocks matter? By Silvestro Di Sanzo

  1. By: Frédéric Docquier (FNRS, IRES, Catholic University of Louvain and IZA Bonn); Oliver Paddison (ECLAC, United Nations Economic Commission for Latin America and the Caribbean); Pierre Pestieau (CREPP, University of Liège, CORE, PSE and CEPR)
    Abstract: This paper considers a three-overlapping-generations model of endogenous growth wherein human capital is the engine of growth. It first contrasts the laissez-faire and the optimal solutions. Three possible accumulation regimes are distinguished. Then it discusses a standard set of tax-transfer instruments that allow for decentralization of the social optimum. Within the limits of our model, the rationale for the standard pattern of intergenerational transfers (the working-aged financing the education of the young and the pension of the old) is seriously questioned. On pure efficiency grounds, the case for generous public pensions is rather weak.
    Keywords: endogenous growth, human capital, intergenerational transfers
    JEL: D90 H21 H52
    Date: 2006–04
  2. By: Ellen R. McGrattan; Lee E. Ohanian
    Abstract: There is much debate about the usefulness of the neoclassical growth model for assessing the macro- economic impact of fiscal shocks. We test the theory using data from World War II, which is by far the largest fiscal shock in the history of the United States. We take observed changes in fiscal policy during the war as inputs into a parameterized, dynamic general equilibrium model and compare the values of all variables in the model to the actual values of these variables in the data. Our main finding is that the theory quantitatively accounts for macroeconomic activity during this big fiscal shock.
    JEL: E0 E6
    Date: 2006–04
  3. By: Zvi Eckstein (Tel Aviv University, University of Minnesota, Federal Reserve Bank of Minneapolis and IZA Bonn); Suqin Ge (University of Minnesota); Barbara Petrongolo (London School of Economics and IZA Bonn)
    Abstract: How well does a simple search on-the-job model fit the eighteen years of job and wage mobility of high school graduates? To answer this question we are confronted from the data with a prevalent non-compliance and exemptions from the minimum wage. We incorporate this observation in a job search model with three main ingredients: (i) search on-the-job; (ii) minimum wages, with potentially imperfect compliance or exemptions; and, (iii) exogenous wage growth on-the-job. We use panel data drawn from the NLSY79, US youth panel starting in 1979, to estimate the parameters of our simple job search model and, in particular, the extent of non-compliance/exemptions to the minimum wage. The model is solved numerically and we use simulated moments to estimate the parameters. The estimated parameters are consistent with the model and they provide a good fit for the observed levels and trends of the main job and wage mobility data. Furthermore, the estimated model indicates that the non-compliance and exemption rate with the federal minimum wage translates into a roughly 10% of jobs paying less than the minimum wage. Counterfactual experiment of increase of the compliance/non-exemption rate or the minimum wage shows a small effect on mean accepted wages but a significant negative effect on the non-employment rate.
    Keywords: minimum wages, compliance, exemptions, job search, wage growth
    JEL: J42 J63 J64
    Date: 2006–04
  4. By: Peter Birch Sørensen (Department of Economics, University of Copenhagen); Martin Ino Hansen (Statistics Denmark); A. Lans Bovenberg (Tilburg University)
    Abstract: Using Danish data, we find that about three fourths of the taxes levied to finance public transfers actually finance benefits that do not redistribute between people but redistribute income over the life cycle of individual taxpayers. This provides a rationale for financing part of social insurance via mandatory individual savings accounts. An account system that offers liquidity insurance and a lifetime income guarantee helps to alleviate the dilemma between insurance and incentives. To illustrate this, we analyse a specific proposal for reform of the Danish system of social insurance, involving the use of individual accounts. We estimate how the reform would affect the distribution of lifetime incomes, the public budget, and economic efficiency. Our analysis suggests that, even with conservative assumptions regarding labor supply elasticities, the proposed reform would generate a Pareto improvement and would imply only a minor increase in the inequality of lifetime income distribution.
    Keywords: social insurance; individual accounts; lifetime income distribution
    JEL: H53 H55
    Date: 2006–03
  5. By: Gabriele Cardullo (Catholic University of Louvain); Bruno Van der Linden (FNRS, Catholic University of Louvain and IZA Bonn)
    Abstract: The search-matching model is well suited for an equilibrium evaluation of labor market policies. When those policies are targeted on some groups, the usual juxtaposition of labor markets is however a shortcoming. There is a need for a setting where workers’ productivity depends on employment levels in all markets. This paper provides such a theoretical setting. We first develop a streamlined model and then show that it can be extended to deal with interactions among various labor market and fiscal policies. Simulation results focus on the effects of employment subsidies and in-work benefits and on their interactions with the profile of unemployment benefits and with active labor market programs.
    Keywords: unemployment, search-matching equilibrium, wage bargaining, reductions of social security contributions, unemployment insurance, labor market programs
    JEL: E24 J3 J41 J64 J65 J68
    Date: 2006–04
  6. By: Pieter A. Gautier (Free University of Amsterdam, Tinbergen Institute and IZA Bonn); Ronald P. Wolthoff (Free University of Amsterdam and Tinbergen Institute)
    Abstract: We study a search model where workers can send multiple applications to high and low productivity firms. Firms that compete for the same candidate can increase their wage offers as often as they like. We show that there is a unique equilibrium where workers mix between sending both applications to the high and both to the low productivity sector. Efficiency requires however that they apply to both sectors because then the coordination frictions are lowest. For many configurations, the equilibrium outcomes are the same under directed and random search. Allowing for free entry creates a second source of inefficiency.
    Keywords: directed search, efficiency, coordination frictions
    JEL: D83 E24 J23 J24 J64
    Date: 2006–03
  7. By: Arjan Lejour; Paul Veenendaal; Gerard Verweij; Nico van Leeuwen
    Abstract: WorldScan is a recursively dynamic general equilibrium model for the world economy, developed for the analysis of long-term issues in international economics. The model is used both as a tool to construct long-term scenarios and as an instrument for policy impact assessments, e.g. in the fields of climate change, economic integration and trade. In general, with each application WorldScan is also adapted. This publication brings the model changes together, explains the model's current structure and illustrates the model's usage with some applications.
    Keywords: applied general equilibrium models; scenario construction; international economic policy analysis
    JEL: C68 O4 F15 Q54
  8. By: Dirk Niepelt (Study Center Gerzensee)
    Abstract: A balanced budget requirement does not only prevent fiscal policy makers from smoothing tax distortions but also affects their preferred choice of government spending. The paper analyzes the conditions under which groups opposed to government spending might want to implement a balanced budget requirement in order to induce the government to spend less. It shows that relaxing a balanced budget requirement need not be associated with higher government spending.
    Date: 2005–10
  9. By: Mathias Trabandt; Harald Uhlig
    Abstract: The goal of this paper is to examine the shape of the Laffer curve quantitatively in a simple neoclassical growth model calibrated to the US as well as to the EU-15 economy. We show that the US and the EU-15 area are located on the left side of their labor and capital tax Laffer curves, but the EU-15 economy being much closer to the slippery slopes than the US. Our results indicate that since 1975 the EU-15 area has moved considerably closer to the peaks of their Laffer curves. We find that the slope of the Laffer curve in the EU-15 economy is much flatter than in the US which documents a much higher degree of distortions in the EU-15 area. A dynamic scoring analysis shows that more than one half of a labor tax cut and more than four fifth of a capital tax cut are self-financing in the EU-15 economy.
    Keywords: Laffer curve, US and EU-15 economy
    JEL: E0 E60 H0
    Date: 2006–04
  10. By: Thomas Crossley; Hamish Low (Institute for Fiscal Studies and Trinity College, Cambridge)
    Abstract: This paper shows that a power utility specification of preferences over total expenditure (ie. CRRA preferences) implies that intratemporal demands are in the PIGL/PIGLOG class. This class generates (at most) rank two demand systems and we can test the validity of power utility on cross-section data. Further, if we maintain the assumption of power utility, and within period preferences are not homothetic, then the intertemporal preference parameter is identi…ed by the curvature of Engel curves. Under the power utility assumption, neither Euler equation estimation nor structural consumption function estimation is necessary to identify the power parameter. In our empirical work, we use demand data to estimate the power utility parameter and to test the assumption of the power utility representation. We find estimates of the power parameter larger than obtained from Euler equation estimation, but we reject the power specification of within period utility.
    Keywords: Elasticity of intertemporal substitution, Euler equation estimation, demand systems
    JEL: D91 E21 D12
    Date: 2005–11
  11. By: Silvestro Di Sanzo (Departamento de Fundamentos del Analisis Economico, Universidad de Alicante)
    Abstract: The aim of this paper is to identify the different sources of persistence of output fluctuations. We propose an unobserved components model that allows us to decompose GDP series into a trend component and a cyclical component. We let the drift of the trend component to switch between different regimes according to a first-order Markov process. To calculate an appropriate p-value for a test of linearity we propose a bootstrap procedure, which allows for general forms of heteroskedasticity. The performance of the bootstrap is checked by means of a Monte Carlo simulation. Our study concerns the U.S. As suggested by the Endogenous Growth theory, cyclical shocks appear to play an important role on the observed persistence of output. We argue that the traditional explanation of persistence, which is related to Real Business Cycle models with exogenous productivity, is not consistent with our data. We also find that the majority of business cycle fluctuations in the U.S. are due to real shocks.
    Keywords: Business cycle; Persistence; Unobserved Components model; First-order Markov process; Wild bootstrap; Monte Carlo
    JEL: C12 C13 C15 C32 E32
    Date: 2006

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