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on Dynamic General Equilibrium |
| By: | Narayana R. Kocherlakota; Luigi Pistaferri |
| Abstract: | Typical incomplete markets models in international economics make two assumptions. First, households are not able to fully insure themselves against country-specific shocks. Second, there is a representative household within each country, so that households are fully insured against idiosyncratic shocks. We assume instead that cross-household risk-sharing is limited within countries, but cross-country risk-sharing is complete. We consider two types of limited risk-sharing: domestically incomplete markets (DI) and private information-Pareto optimal (PIPO) risk-sharing. We show that the models imply distinct restrictions between the cross-sectional distributions of consumption and real exchange rates. We evaluate these restrictions using household-level consumption data from the United States and the United Kingdom. We show that the PIPO restriction fits the data well when households have a coefficient of relative risk aversion of around 5. The analogous restrictions implied by the representative agent model and the DI model are rejected at conventional levels of significance. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:372&r=dge |
| By: | Carolyn Sissoko (Department of Economics, Occidental College) |
| Abstract: | This note observes that in a simple infinite horizon economy with heterogeneous endowments and a cash-in-advance constraint the Friedman Rule holds, but can be implemented only with type-specific taxation. By contrast, if credit contracts are enforceable, the same allocation can be reached in equilibrium without type specific policy. The Friedman Rule is reinterpreted as a statement that fiat money is inferior to credit as a form of money. |
| JEL: | E4 E5 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:occ:wpaper:7&r=dge |
| By: | Antonia Díaz; Maria J. Luengo-Prado |
| Abstract: | This paper studies the determinants of housing tenure choice and the differences in the cost of housing services across households in an overlapping generations model with household-specific uninsurable earnings risk and housing prices that vary over time. We model houses as illiquid assets that provide collateral for loans. To analyze the impact of preferential housing taxation on the tenure choice, we consider a tax system that mimics that of the U.S. economy in a stylized way. We find that a mixture of idiosyncratic earnings uncertainty, house price risk, down payments and transaction costs are needed for the model to deliver life cycle patterns of homeownership and portfolio composition similar to those found in the data. Through simulations, we also show that a rental equivalence approach (relative to a user cost approach) overestimates the mean unit cost of housing by approximately 3 percent. |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2006-14&r=dge |
| By: | Carolyn Sissoko (Department of Economics, Occidental College) |
| Abstract: | This paper develops a monetary model based on a standard infinite horizon general equilibrium endowment economy by relaxing the general equilibrium assumption that every agent buys and sells simultaneously. The paper finds that fiat money can implement a Pareto optimum only if taxes are type-specific. We then consider intermediated money by assuming that financial intermediaries whose liabilities circulate as money have an important identifying characteristic: they are widely viewed as default-free. The paper demonstrates that default-free intermediaries who issue credit cards to consumers can resolve the monetary problem without type-specific policy. We argue that our idealized financial environment is a starting point for studying the monetary use of credit. |
| JEL: | E5 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:occ:wpaper:6&r=dge |
| By: | Peter J. Klenow; Jonathan L. Willis |
| Abstract: | A large literature seeks to provide microfoundations of price setting for macro models. A challenge has been to develop a model in which monetary policy shocks have the highly persistent effects on real variables estimated by many studies. Nominal price stickiness has proved helpful but not sufficient without some form of "real rigidity" or "strategic complementarity." We embed a model with a real rigidity a la Kimball (1995), wherein consumers flee from relatively expensive products but do not flock to inexpensive ones. We estimate key model parameters using micro data from the U.S. CPI, which exhibit sizable movements in relative prices of substitute products. When we impose a significant degree of real rigidity, fitting the micro price facts requires very large idiosyncratic shocks and implies large movements in micro quantities. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp06-03&r=dge |
| By: | Paul Willen; Felix Kubler |
| Abstract: | We examine the effects of collateralized borrowing in a realistically parameterized life-cycle portfolio choice problem. We provide basic intuition in a two-period model and then solve a multi-period model computationally. Our analysis provides insights into life-cycle portfolio choice relevant for researchers in macroeconomics and finance. In particular, we show that standard models with unlimited borrowing at the riskless rate dramatically overstate the gains to holding equity when compared with collateral-constrained models. Our results do not depend on the specification of the collateralized borrowing regime: The gains to trading equity remain relatively small even with the unrealistic assumption of unlimited leverage. We argue that our results strengthen the role of borrowing constraints in explaining the portfolio participation puzzle, that is, why most investors do not own stock. |
| Keywords: | Margin accounts ; Investments ; Securities |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbpp:06-4&r=dge |
| By: | Kazuya Kamiya (Faculty of Economics, University of Tokyo); Takashi Shimizu (Department of Economics, Kansai University) |
| Abstract: | A conventional wisdom in economics is that a model dealing frictionless markets with a large number of agents always yields a Walrasian outcome. In this paper we assess the above argument in a dynamic framework by modeling centralized auction markets, and show that in such markets the outcomes are not necessarily Walrasian; the set of stationary equilibria in our model is a continuum which includes the Walrasian equilibrium. Moreover, we also buildamodelondecentralized auction markets and obtain similar results. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2006cf417&r=dge |
| By: | Carolyn Sissoko (Department of Economics, Occidental College) |
| Abstract: | This paper develops a mechanism that links the combined monetary and financial role of intermediaries to the division of labor and endogenous growth. The mechanism is based on an analysis of the late 18th century British environment. At this time the money supply was composed mainly of circulating private debt, which was liquid because of the intermediation of bankers. The model builds on an augmented Ramsey Cass Koopmans (RCK) model of optimal growth. First, by relaxing the assumption that each agent buys and sells at the same time an endogenous cash-in-advance constraint is created. The cash constraint is not binding for agents who borrow from intermediaries at the start of a period and repay the debt at the end of the period. Thus intermediated short-term credit is a solution to the monetary friction. Second to address the division of labor the symmetric n-good n-type structure of Kiyotaki and Wright’s search model of money is nested into each period of the model. Because each type of agent is more productive when his production is specialized, relaxing the cash constraint leads to a division of labor. Finally the exogenous growth of the RCK model is reinterpreted as endogenous growth due to a process of learning-by-doing. We find that financial intermediaries by relaxing the cash constraint promote the division of labor which generates a process of endogenous growth. Because the growth rate of the economy is increasing in the quantity of credit in the economy, the model provides a theoretic explanation for the empirical findings of Levine, Loayza and Beck and Rousseau and Wachtel. |
| JEL: | E5 O3 O4 |
| Date: | 2002–08 |
| URL: | http://d.repec.org/n?u=RePEc:occ:wpaper:8&r=dge |
| By: | Gauti B. Eggertsson |
| Abstract: | This paper addresses the effectiveness of fiscal policy at zero nominal interest rates. I analyze a stochastic general equilibrium model with sticky prices and rational expectations and assume that the government cannot commit to future policy. Real government spending increases demand by increasing public consumption. Deficit spending increases demand by generating inflation expectations. I derive fiscal spending multipliers that calculate how much output increases for each dollar of government spending (real or deficit). Under monetary and fiscal policy coordination, the real spending multiplier is 3.4 and the deficit spending multiplier is 3.8. However, when there is no policy coordination, that is, when the central bank is "goal independent," the real spending multiplier is unchanged but the deficit spending multiplier is zero. Coordination failure may explain why fiscal policy in Japan has been relatively less effective in recent years than during the Great Depression. |
| Keywords: | Fiscal policy ; Government spending policy ; Deficit financing ; Monetary policy |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:241&r=dge |
| By: | Selim, Sheikh Tareq (Cardiff Business School) |
| Abstract: | This paper examines the equivalence of the two key results that dominate the discussion on Ramsey tax policy with imperfect competition. With imperfectly competitive intermediate goods market, the long run Ramsey policy is consistent with capital tax or subsidy, and this result is generally dominant if the government is permitted or not permitted to use any other subsidy, or if the government has access to consumption tax. This is an important extension of the two effect result due primarily to Guo & Lansing (1999). Access to consumption tax but no access to labor subsidy enables the government to reduce labor tax in monopoly sector to zero, but the two effect result for capital taxation remains unaltered. Qualifying Judd’s (1997) principle of optimal capital subsidy requires full confiscation of profits, or subsidizing capital income at a rate that may be larger than the first best subsidy rate. The strong motivation to tax capital assists in explaining the repeal of the Investment Tax Credit scheme in the US. |
| Keywords: | Optimal taxation; Monopoly power; Ramsey policy |
| JEL: | D42 E62 H21 H30 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2006/20&r=dge |
| By: | John Stachurski (Department of Economics, University of Melbourne) |
| 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. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:618&r=dge |
| By: | Kazuo Nishimura (Institute of Economic Research, Kyoto University); John Stachurski (Department of Economics, University of Melbourne) |
| Abstract: | Dutta (J. Econom. Theory, 1991, 55, 64?94) showed that long-run optimality of the limit of discounted optima when the discount rate vanishes is implied by a certain bound on the value function of the optimal program. We introduce a new method to verify this bound using coupling techniques. |
| Keywords: | Dynamic programming, Long-run optimality. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:617&r=dge |