nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒05‒20
sixteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Intertemporal Disturbances By Giorgio E. Primiceri; Ernst Schaumburg; Andrea Tambalotti
  2. On the Optimal Timing of Benefits with Heterogenous Workers and Human Capital Depreciation By Robert Shimer; Iván Werning
  3. A Dynamic Theory of Public Spending, Taxation and Debt By Marco Battaglini; Stephen Coate
  4. Portfolio Choice in a Monetary Open-Economy DSGE Model By Charles Engel; Akito Matsumoto
  5. Schooling, learning on-the-job, earnings and inequality By Luis P. Correia
  6. Markets Versus Governments: Political Economy of Mechanisms By Daron Acemoglu; Michael Golosov; Aleh Tsyvinski
  7. Optimal social security in a dynastic model with investment externalities and endogenous fertility By Zeng, J; Jie Zhang
  8. Inflation Taxation and Welfare with Externalities and Leisure By Ho, W-M, Zeng, J.; Jie Zhang
  9. Welfare-based monetary policy rules in an estimated DSGE model of the US economy By Michel Juillard; Philippe Karam; Douglas Laxton; Paolo Pesenti
  10. The Economic Dynamics in Amoroso's Contribution By Cristina Nardi Spiller; Mario Pomini
  11. Gains de productivité et contrôle de la recherche d'emploi. By Solenne Tanguy
  12. Public jobs creation and unemployment dynamics. By Céline Choulet
  13. Return Migration and Saving Behavior of Foreign Workers in Germany By Murat G. Kirdar
  14. Inequality Constraints in Recursive Economies By Pontus Rendahl
  15. Home Production, Market Production and the Gender Wage Gap: Incentives and Expectations By Stefania Albanesi; Claudia Olivetti
  16. The Causes of Japan%u2019s %u2018Lost Decade%u2019: The Role of Household Consumption By Charles Yuji Horioka

  1. By: Giorgio E. Primiceri; Ernst Schaumburg; Andrea Tambalotti
    Abstract: Disturbances affecting agents intertemporal substitution are the key driving force of macroeconomic fluctuations. We reach this conclusion exploiting the bond pricing implications of an estimated general equilibrium model of the U.S. business cycle with a rich set of real and nominal frictions.
    JEL: E30 E32 E44
    Date: 2006–05
  2. By: Robert Shimer; Iván Werning
    Abstract: This paper studies the optimal timing of unemployment insurance subsidies in a McCall search model. Risk-averse workers sequentially sample random job opportunities. Our model distinguishes unemployment subsidies from consumption during unemployment by allowing workers to save and borrow freely. When the insurance agency faces a group of homogeneous workers solving stationary search problems, the optimal subsidies are independent of unemployment duration. In contrast, when workers are heterogeneous or when human capital depreciates during the spell, the optimal subsidy is no longer constant. We explore the main determinants of the shape of the optimal subsidy schedule, isolating forces for subsidies to optimally rise or fall with duration.
    JEL: J6
    Date: 2006–05
  3. By: Marco Battaglini; Stephen Coate
    Date: 2006–05–11
  4. By: Charles Engel; Akito Matsumoto
    Abstract: This paper develops a two-country monetary DSGE model in which households choose a portfolio of home and foreign equities, and a forward position in foreign exchange. Some goods prices are set without full information of the state. We show that temporarily sticky nominal goods prices can have large effects on equity portfolios. Home and foreign portfolios are not identical in equilibrium. In response to technology shocks, sticky prices generate a negative correlation between labor income and the profits of domestic firms, biasing portfolios in favor of home equities. In contrast, under flexible prices, labor income and the profits of the domestic firms are positively correlated. Even a small amount of nominal price stickiness can generate these portfolio differences, depending on the diversification role played by the terms of trade. Returns on human capital and equities may be positively correlated under sticky prices when the source of shocks is monetary, but this risk is hedged through nominal assets rather than through equities.
    JEL: F31 F41 G11
    Date: 2006–05
  5. By: Luis P. Correia
    Abstract: Why might people in poor countries leave school earlier and invest less in learning on-thejob than people in rich ones? How do these human capital decisions impact on inequality? To give quantitative answers to these questions, I build an overlapping generations model with optimal human capital accumulation and a given distribution of abilities. Variation in mortality and population growth rates can generate large variability in schooling decisions, earnings profiles and measures of inequality. High mortality and population growth rates are shown to produce comparatively little investment in human capital, flat earnings profiles and low inequality, both within and across cohorts.
    Keywords: human capital, earnings profiles, schooling, inequality.
    JEL: I20 J11 J24 O11 O40
    Date: 2006–05
  6. By: Daron Acemoglu; Michael Golosov; Aleh Tsyvinski
    Abstract: We study the optimal Mirrlees taxation problem in a dynamic economy with idiosyncratic (productivity or preference) shocks. In contrast to the standard approach, which implicitly assumes that the mechanism is operated by a benevolent planner with full commitment power, we assume that any centralized mechanism can only be operated by a self-interested ruler/government without commitment power, who can therefore misuse the resources and the information it collects. An important result of our analysis is that there will be truthful revelation along the equilibrium path (for all positive discount factors), which shows that truth-telling mechanisms can be used despite the commitment problems and the different interests of the government. Using this tool, we show that if the government is as patient as the agents, the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear. In contrast, when the government is less patient than the citizens, there are positive aggregate distortions and positive aggregate capital taxes even asymptotically. Under some additional assumptions on preferences, these results generalize to the case when the government is benevolent but unable to commit to future tax policies. We conclude by providing a brief comparison of centralized mechanisms operated by self-interested rulers to anonymous markets.
    JEL: H11 H21 E61 P16
    Date: 2006–05
  7. By: Zeng, J; Jie Zhang (MRG - School of Economics, The University of Queensland)
    Abstract: This paper studies optimal pay-as-you-go social security with positive bequests and endogenous fertility. With an investment externality, a competitive solution without social security su?ers from under-investment in capital and over-reproduction of population. We show that social security can improve welfare by reducing fertility and increasing capital intensity. We also illustrate numerically that a small degree of this externality is enough to justify the observed high ratios of social security spending to GDP.
  8. By: Ho, W-M, Zeng, J.; Jie Zhang (MRG - School of Economics, The University of Queensland)
    Abstract: This paper examines how inflation taxation a ects resource allocation and welfare in a neoclassical growth model with leisure, a production externality and money in the utility function. Switching from consumption taxation to inflation taxation to finance government spending reduces real money balances relative to income, but increases consumption, labor, capital and output. The net welfare effect of this switch depends crucially on the strength of the externality and on the elasticity of intertemporal substitution: While it is always negative without the externality, it is likely to be positive with a strong externality and elastic intertemporal substitution.
  9. By: Michel Juillard (CEPREMAP and University Paris 8, 2 rue de la Liberté, 93526 Saint-Denis Cedex 02, France.); Philippe Karam (International Monetary Fund (IMF), 700 19th Street NW, Washington, DC 20431, United States.); Douglas Laxton (International Monetary Fund (IMF), 700 19th Street NW, Washington, DC 20431, United States.); Paolo Pesenti (NBER, CEPR and Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, United States.)
    Abstract: We develop and estimate a stylized micro-founded model of the US economy. Next we compute the parameters of a simple interest rate policy rule that maximizes the unconditional mean of utility. We show that such a welfare-based rule lies close to the Taylor efficiency frontier. A counterfactual analysis assesses to what extent using such a rule as a guideline for monetary policy would have helped to avoid the inflationary swings of the 1970s and reduce the severity of boom and bust cycles. The paper also provides estimates of the welfare implications of business cycle variability and discusses their relevance.
    Keywords: Competition, Markups, Monetary Policy, Taylor Rule.
    JEL: C51 E31 E52
    Date: 2006–04
  10. By: Cristina Nardi Spiller (Dipartimento di Scienze economiche (Università di Verona)); Mario Pomini (Università di Padova)
    Abstract: This paper aims to highlight the main features of Amoroso's reflections on macroeconomic dynamics to which he dedicated a large part of his scientific activity. He developed an original theory of business cycle and he formulated a dynamic generalisation of the Paretian theory of general economic equilibrium which can be considered the main achievement of dynamic macroeconomics due to its ability to extend the analysis of optimising behaviour to an intertemporal context of resource allocation. The influence of Amoroso was modest despite its undoubted analytical capacity, probably because it was too faithful to a Paretian vision of economic relations and at epistemological level too closely connected to the models of nineteenth century physics which he tried to economic reasoning
    Keywords: business cycles, growth, dynamic theory
    JEL: N1
    Date: 2006–01
  11. By: Solenne Tanguy (Centre d'Economie de la Sorbonne)
    Abstract: This article analyses the effectiveness of a system of job search monitoring system. Such a system leads the unemployed workers to reduce their wage requirements what results in a fall of the wages and in consequence of the unemployment rate. This article shows that a rise of the unemployment benefit can reduce the unemployment rate if the penalty imposed in the event of job refusal corresponds to a suppression of the allowances. However a stronger wage moderation can be problematic. This system encourages the workers indeed to accept quickly jobs that are not very productive. Because the composition of jobs also changes, total output and welfare would decrease as well. Finally, what is gained on the quantitative level is lost on the qualitative level.
    Keywords: Unemployment insurance, monitoring, productivity, quality of jobs.
    JEL: J64 J65 J68
    Date: 2005–02
  12. By: Céline Choulet (Centre d'Economie de la Sorbonne)
    Abstract: This paper raises the question of the dynamic effects of public spending in jobs on labor market performance. We use a dynamic matching model and study how public jobs creation affects endogenous workers' decisions to move on the labor market and private-sector firms' job creation and destruction decisions. We obtain that it exerts an attracting effect and a fiscal effect on the labor market that make the unemployment rate and job flows overshoot. As an empirical illustration, we estimate a SVAR model that focuses on the consequences of public job creations on unemployment, wages and job flows dynamics. We confirm our intuition : public employment has a significant ambiguous effect on private wages.
    Keywords: Public sector labor market, unemployment dynamics.
    JEL: J45 J21
    Date: 2006–03
  13. By: Murat G. Kirdar (Department of Economics, METU)
    Abstract: In this paper, I develop a dynamic stochastic model of joint return migration and saving decisions that accounts for uncertainty in future employment and income and estimate this model using a longitudinal dataset on legal immigrants in Germany. The model gives a number of implications about the level, timing and selection of return migration as well as asset accumulation of immigrants according to their country of origin We also calculate the net lifetime contributions of immigrants to the pension and unemployment insurance systems of the host country. The estimated model is used to determine the impact of a number of counterfactual policy experiments on the return and savings behavior of immigrants as well as on their net contribution to the social security system. These counterfactuals include changes in the unemployment insurance program, payment of bonuses to selected groups to encourage return home, and exchange rate premiums by the source countries. In addition, I assess the impact of counterfactuals in the macroeconomic environment, like changes in wages in Germany and in purchasing power parity between Germany and the source countries.
    Keywords: International Migration, Unemployment Insurance, Life Cycle Models and Saving, Public Policy
    JEL: J61 D91 J64 J65 J68
    Date: 2005–11
  14. By: Pontus Rendahl
    Abstract: Dynamic models with inequality constraints pose a challenging problem for two major reasons: Dynamic Programming techniques often necessitate a non established differentiability of the value function, while Euler equation based techniques have problematic or unknown convergence properties. This paper aims to resolve these two concerns: An "envelope theorem" is presented that establishes the differentiability of any element in the convergent sequence of approximate value functions when inequality constraints may bind. As a corollary, convergence of an iterative procedure on the Euler equation, usually referred to as time iteration, is ascertained. This procedure turns out to be very convenient from a computational perspective; dynamic economic problems with inequality constraints can be solved reliably and extremely efficiently by exploiting the theoretical insights provided by the paper.
    Keywords: Inequality constraints; Envelope theorem; Recursive methods; Time iteration
    JEL: C61 C63 C68
    Date: 2006
  15. By: Stefania Albanesi; Claudia Olivetti
    Abstract: The purpose of this paper is to study the joint determination of gender differentials in labor market outcomes and in the household division of labor. Specifically, we explore the hypothesis that incentive problems in the labor market amplify differences in earnings due to gender differentials in home hours. In turn, earnings differentials across genders reinforce the division of labor within the household. This gives rise to a potentially self-fulfilling feedback mechanism. As a consequence, gender differentials in earnings will be larger than any initial difference in relative productivity across genders. Even if productivity in home and market work is the same for female and male workers, both gendered and ungendered equilibria are possible and equally likely. If womens' comparative advantage in home production is large enough, there exists a unique equilibrium in which they have higher home hours and lower earnings than men. Our model delivers predictions on the relation between earnings ratios, incentive pay and home hours. First, gender earnings differentials should be higher for married workers in occupations in which the incentive problem is more severe. This effect should be stronger when the gender difference in home hours is greater. Moreover, the difference in the fraction of incentive pay across genders should be smaller for higher values of the female/male earnings ratio. Second, the husband/wife ratio of home hours should be negatively related with both the husband/wife earnings ratio and the difference in the fraction of incentive pay. We use the Census and the PSID to study these predictions and find that they are amply supported by the data.
    JEL: J2 J3
    Date: 2006–05
  16. By: Charles Yuji Horioka
    Abstract: In this paper, I analyze the causes of the prolonged slowdown of the Japanese economy in the 1990s and find that the stagnation of investment, especially private fixed investment, was the primary culprit. I then investigate the causes of the stagnation of household consumption during the 1990s and find that the stagnation of household disposable income, the decline in household wealth, and increased uncertainty about the future are among the contributing factors. Finally, I consider whether demand side factors or supply side factors were more important as causes of the prolonged slowdown of the Japanese economy in the 1990s and conclude that the former (especially misguided government policies) were probably more important.
    JEL: D12 E21 E32 O47
    Date: 2006–04

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