nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒05‒27
ten papers chosen by
Christian Zimmermann
University of Connecticut

  1. Timing transitions between determinate and indeterminate equilibria in an empirical DSGE model: benefits and implications By Anatoliy Belaygorod; Michael J. Dueker
  2. Improving Tatonnement Methods of Solving Heterogeneous Agent Models By Alexander Ludwig
  3. Volatility, growth, and large welfare gains from stabilization policies By Pengfei Wang; Yi Wen
  4. Time-to-Build Echoes Author- Fabrice Collard By Omar Licandro; Luis A. Puch
  5. Trade adjustment and the composition of trade By Christopher J. Erceg; Luca Guerrieri; Christopher Gust
  6. Method to Find the VARs Easily By Angela Birk
  7. Disparities in Pension Financing in Europe: Economic and Financial Consequences By Jean Chateau; Xavier Chojnicki
  8. Technology Shocks and the Labor-Input Response: Evidence from Firm-Level Data By Carlsson, Mikael; Smedsaas, Jon
  9. On the Persistence of Inequality in the Distribution of Personal Abilities and Income By Zon, Adriaan van; Kiiver, Hannah
  10. Asset prices and liquidity in an exchange economy By Ricardo Lagos

  1. By: Anatoliy Belaygorod; Michael J. Dueker
    Abstract: We extend Lubik and Schorfheide's (2004) likelihood-based estimation of dynamic stochastic general equilibrium (DSGE) models under indeterminacy to encompass a sample period including both determinacy and indeterminacy by implementing the change-point methodology (Chib, 1998). This feature is useful because DSGE models generally are estimated with data sets that include the Great Inflation of the 1970s and the surrounding low inflation periods. Timing the transitions between determinate and indeterminate equilibria is one of the key contributions of this paper. Moreover, by letting the data provide estimates of the state transition dates and allowing the estimated structural parameters to be the same across determinacy states, we obtain more precise estimates of the differences in characteristics, such as the impulse responses, across the states. In particular, we find that positive interest rate shocks were inflationary under indeterminacy. While the change-point treatment of indeterminacy is applicable to all estimated linear DSGE models, we demonstrate our methodology by estimating the canonical Woodford model with a time-varying inflation target. Implementation of the change-point methodology coupled with Tailored Metropolis-Hastings provides a highly efficient Bayesian MCMC algorithm. Our prior-posterior updates indicate substantially lower sensitivity to hyperparameters of the prior relative to other estimated DSGE models.
    Keywords: Equilibrium (Economics) - Mathematical models ; Econometric models - Evaluation
    Date: 2006
  2. By: Alexander Ludwig (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: This paper modifies standard block Gauss-Seidel iterations used by tatonnement methods for solving large scale deterministic heterogeneous agent models. The composite method between first- and second-order tatonnement methods is shown to considerably improve convergence both in terms of speed as well as robustness relative to conventional first-order tatonnement methods. In addition, the relative advantage of the modified algorithm increases in the size and complexity of the economic model. Therefore, the algorithm allows significant reductions in computational time when solving large models. The algorithm is particularly attractive since it is easy to implement - it only augments conventional and intuitive tatonnement iterations with standard numerical methods.
    JEL: C63 C68 E13
    Date: 2004–09–10
  3. By: Pengfei Wang; Yi Wen
    Abstract: This paper proposes a simple endogenous-fluctuations growth model to show: 1) long-run growth and short-run fluctuations can be intimately linked; in particular, the rate of long run growth can be negatively affected by volatilities; 2) imperfect competition can cause endogenous fluctuations, and it reduces not only the level of output but also its mean growth rate by amplifying the volatility of the economy; and 3) the welfare gain of stabilization policy can be enormous (e.g., as high as 25% of annual consumption when calibrated to the U.S. data) because policies designed to reduce sunspots-driven fluctuations can generate permanently higher rates of growth.
    Date: 2006
  4. By: Omar Licandro; Luis A. Puch
    Abstract: In an optimal growth model with a time-to-build delay, the feasibility condition is a delayed-differential equation, and the Euler-type condition is an advanced-differential equation. As in Kalecki's theory of business cycles, the delayed nature of the feasibility constraint naturally induces cycles. However, the advanced nature of the Euler-type equation dampens fluctuations through smoothing, making the economy converge by oscillations. We refer to this result as time-to-build echoes.
  5. By: Christopher J. Erceg; Luca Guerrieri; Christopher Gust
    Abstract: A striking feature of U.S. trade is that both imports and exports are heavily concentrated in capital goods and consumer durables. However, most open economy general equilibrium models ignore the marked divergence between the composition of trade flows and the sectoral composition of U.S. expenditure, and simply posit import and exports as depending on an aggregate measure of real activity (such as domestic absorption). In this paper, we use a SDGE model (SIGMA) to show that taking account of the expenditure composition of U.S. trade in an empirically-realistic way yields implications for the responses of trade to shocks that are markedly different from those of a "standard" framework that abstracts from such compositional differences. Overall, our analysis suggests that investment shocks, originating from either foreign or domestic sources, may serve as an important catalyst for trade adjustment, while implying a minimal depreciation of the real exchange rate.
    Date: 2006
  6. By: Angela Birk
    Abstract: The paper shows an easy method to get the impulse responses of VARs of a stochastic recursive dynamic macro model by defining the transition matrix and the stationary distribution function of a model using the model, i.e. economic theory, itself.
  7. By: Jean Chateau; Xavier Chojnicki
    Abstract: We present a quantitative analysis of the impact of differential ageing and pension reforms on capital and labour market and, in particular, on intra-European capital flows. To this end, we develop a stylized general equilibrium model with overlapping generations of heterogeneous agents for the three largest European countries: France, Germany and the United-Kingdom. The model presents a structure halfway between pure general equilibrium models with rigorous microeconomic foundations accounting models where the macroeconomic environment remains exogenous. We show that the dynamics of capital accumulation and pension system sustainability are totally different depending on the assumption concerning economic openness. Two main conclusions may be drawn from the examination of the various prospective scenarios. First of all, the critical assumptions for PAYG systems are the future trend of the global factor productivity and the behavior of agents concerning activity and labour market participation. Secondly, in the long run, resorting to debt financing seems to be a dead end to finance retirement systems.
    Keywords: Public pensions; ageing; computable general equilibrium model
    JEL: H55 J1 C68
    Date: 2006–05
  8. By: Carlsson, Mikael (Research Department, Central Bank of Sweden); Smedsaas, Jon (Department of Economics)
    Abstract: We study the relationship between technology shocks and labor input on Swedish firm-level data using a production function approach to identify technology shocks. Taking standard steps yields a contractionary contemporaneous labor-input response in line with previous studies. This finding may, however, be driven by measurement errors in the labor-input variable. Relying on a unique feature of our data set, which contains two independently measured firm-specific labor input measures, we can evaluate the potential bias. We do not find any evidence supporting that this bias would conceal any true positive contemporaneous effect. The results thus point away from standard flexible-price models and towards models emphasizing firm-level rigidities.
    Keywords: Technology Shocks; Labor Input; Business Fluctuations; Micro Data
    JEL: C33 D24 E32
    Date: 2006–05–01
  9. By: Zon, Adriaan van (United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology); Kiiver, Hannah (Utrecht School of Economics)
    Abstract: In this paper we discuss the impact of malnutrition on the distribution of abilities and income in a simple overlapping generations framework. Workers are distributed uniformly over a low-ability and a high-ability range. If workers earn below subsistence wages, the probability that their children will have low abilities is higher than with above subsistence wages due to the malnutrition resulting from low incomes. Using a nested Ethier production function we find that there is an optimal share of low-ability workers in the economy which maximizes output. Due to the intergenerational propagation of low abilities resulting from malnutrition, economies may however get trapped in sub-optimal equilibria with too large shares of low-ability workers. Distributing food coupons financed by taxes of the parent generation to the offspring of these low-ability workers will increase the likelihood that they will be in the high-ability range, permanently increasing output for future generations. Using a numerical example, we show that this type of redistributive policy is welfare improving if the parent generation alive during the initiation of the policy is reimbursed for their loss in utility due to taxes.
    Keywords: Income Distribution, Wage Differentials, Skills
    JEL: D31 J31
    Date: 2006
  10. By: Ricardo Lagos
    Abstract: I develop an asset-pricing model in which financial assets are valued for their liquidity—the extent to which they are useful in facilitating exchange—as well as for being claims to streams of consumption goods. The implications for average asset returns, the equity-premium puzzle and the risk-free rate puzzle, are explored in a version of the model that nests the work of Mehra and Prescott (1985).
    Date: 2006

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