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on Dynamic General Equilibrium |
| By: | Harald Uhlig |
| Abstract: | Linear Methods are often used to compute approximate solutions to dynamic models, as these models often cannot be solved analytically. Linear methods are very popular, as they can easily be implemented. Also, they provide a useful starting point for understanding more elaborate numerical methods. It shall be described here first for the example of a simple real business cycle model, including how to easily generate the log-linearized equations needed before solving the linear system. For a general framework, formulas are provided for calculating the recursive law of motion. The algorithm described here is implemented with the "toolkit" programs available per "http://www.wiwi.hu-berlin.de/wpol/html/toolkit.htm" . |
| Keywords: | numerical methods, linear solution method, loglinearization, dynamic stochastic general equilibrium methods, recursive law of motion |
| JEL: | C60 C61 C63 E32 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-030&r=dge |
| By: | John Y. Campbell; Yves Nosbusch |
| Abstract: | In the presence of overlapping generations, markets are incomplete because it is impossible to engage in risksharing trades with the unborn. In such an environment the government can use a social security system, with contingent taxes and benefits, to improve risksharing across generations. An interesting question is how the form of the social security system affects asset prices in equilibrium. In this paper we set up a simple model with two risky factors of production: human capital, owned by the young, and physical capital, owned by all older generations. We show that a social security system that optimally shares risks across generations exposes future generations to a share of the risk in physical capital returns. Such a system reduces precautionary saving and increases the risk-bearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, lowers the price of physical capital, and reduces the risk premium on physical capital. |
| JEL: | G1 H3 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12204&r=dge |
| By: | Alison Booth (Economics Program, RSSS, ANU); Melvyn Coles; Xiaodong Gong |
| Abstract: | We model educational investment and labor supply in a competitive economy with home and market production. Heterogeneous workers are assumed to have different productivities both at home and in the workplace. We show that there are increasing returns to education at the labor market participation margin, and that these depend directly on the elasticity of labor supply with respect to wages. Thus the increasing returns to education problem will be most relevant for women or other types with large enough home productivity. We estimate a three equation recursive model of working hours, wages and years of schooling, and find empirical support for the main predictions of the model. |
| Keywords: | returns to education, home production, labor supply |
| JEL: | H24 J13 J24 J31 J42 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:auu:dpaper:522&r=dge |
| By: | Areendam Chanda; Debajyoti Chakrabarty; Chetan Ghate |
| Abstract: | The conventional wisdom in the literature on capital controls and growth argues that capital controls increase the ability of a government to tax capitalists which proves detrimental for growth. To address this issue, we construct an OLG model to study the effect of capital controls on human capital investments and the incidence of redistributive taxation in a growing economy. We argue to the contrary: i.e., the conventional wisdowm linking higher capital controls to lower growth is reproduced only when an economy is sufficiently developed. For under-developed countries, higher capital controls can induce balanced growth, and the wisdom does not apply. When the model is augmented with a subsistence sector, we show that if workers are sufficiently poor, then workers do not invest in human capital. Hence, a modern sector does not exist. Higher capital controls however makes it feasible for a modern sector to exist by lowering the threshold income level required by workers to invest in human capital. Our results are consistent with recent evidence which show that, while financial liberalizations are associated with significant increases in growth, the effect is larger for countries with high education levels. Our results are also consistent with empirical evidence that argues that liberalizing the capital account positively affects growth only after a country has achieved a certain degree of economic development. |
| URL: | http://d.repec.org/n?u=RePEc:lsu:lsuwpp:2006-10&r=dge |
| By: | Alessio J. G. Brown (Kiel Institute for World Economics and University of Kiel); J. Michael Orszag (Watson Wyatt Worldwide and IZA Bonn); Dennis J. Snower (Kiel Institute for World Economics, University of Kiel, CEPR and IZA Bonn) |
| Abstract: | We explore the far-reaching implications of replacing current unemployment benefit (UB) systems by an unemployment accounts (UA) system. Under the UA system, employed people are required to make ongoing contributions to their UAs and the balances in these accounts are available to them during periods of unemployment. The government is able to undertake balanced-budget interpersonal redistributions among the UAs. At the end of their working lives, people could transfer the remaining balances on their UAs into their pensions. We present an analytical framework to analyse the incentive effects of UAs and calibrate our model for the high unemployment countries of Europe. Our results suggest that this policy reform would significantly change people’s employment incentives and could achieve reductions in unemployment without reducing the level of support to the unemployed. |
| Keywords: | unemployment benefits, unemployment accounts, redistribution, employment, unemployment |
| JEL: | I38 J22 J32 J38 J64 J65 J68 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2105&r=dge |