nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒06‒10
nine papers chosen by
Christian Zimmermann
University of Connecticut

  1. Putting the New Keynesian Model to a Test By G. PEERSMAN; R. STRAUB
  2. Solving SDGE Models: A New Algorithm for the Sylvester Equation By Ondrej Kamenik
  3. Plant-Level Nonconvexities and the Monetary Transmission Mechanism By Roman Sustek
  4. Employment subsidies and substitutable skills : An equilibrium matching approach By Gabriele, CARDULLO; Bruno, VANDERLINDEN
  5. The Effects of Labor Market Policies in an Economy with an Informal Sector By James Albrecht; Lucas Navarro; Susan Vroman
  6. Technological Progress, Obsolescence and Depreciation By Raouf, BOUCEKKINE; Fernando, DEL RIO; David, DE LA CROIX
  7. The effects of the marginal tax rate in a matching model with endogenous labor supply By Alexis, PARMENTIER
  8. An Economy in Transition and DSGE: What the Czech National Bank’s New Projection Model Needs By Jaromir Benes; Tibor Hledik; Michael Kumhof; David Vavra
  9. Population Aging, Fiscal Policies, and National Saving: Predictions for Korean Economy By Young Jun Chun

    Abstract: In recent years, New Keynesian dynamic stochastic general equilibrium (NK DSGE) models have become increasingly popular in the academic literature and in policy analysis. However, it is still disputed how successful these models are in reproducing the dynamic behavior of an economy following structural shocks. This paper is an attempt to shed some light on this issue. We use a VAR with sign restrictions that are robust to model and parameter uncertainty to estimate the effects of monetary policy, preference, government spending, investment, price markup, technology and labor supply shocks on macroeconomic variables in the United States and the euro area. In contrast to the NK DSGE models, the empirical results indicate that technology shocks have a positive effect on hours worked, and investment and preference shocks have a positive impact on consumption and investment, respectively. While the former is in line with the predictions of Real Business Cycle (RBC) models, the latter indicates the relevance of accelerator effects, as described in the earlier Keynesian literature. Furthermore, we show that NK DSGE models might overemphasize the role of cost-push shocks in business cycle fluctuations, while in the same time underestimating the importance of other shocks such as changes in technology and investment adjustment costs.
    Keywords: DSGE models; vector autoregressions; sign restrictions
    JEL: C32 C51 E32 E52
    Date: 2006–03
  2. By: Ondrej Kamenik
    Abstract: This paper presents a new numerical algorithm for solving the Sylvester equation involved in higher-order perturbation methods developed for solving stochastic dynamic general equilibrium models. The new algorithm surpasses other methods used so far (including the very popular doubling algorithm) in terms of computational time, memory consumption, and numerical stability.
    Keywords: Dynamic general equilibrium, doubling algorithm, perturbation approach, recursive algorithm.
    JEL: C63 C68
    Date: 2005–12
  3. By: Roman Sustek
    Abstract: Micro-level empirical evidence suggests that plant managers adjust production by utilizing capital along nonconvex margins. Existing models of the monetary transmission mechanism (MTM), however, assume that production units adjust output smoothly. The objective of this paper is to determine whether such plant-level nonconvexities affect the MTM in a quantitatively significant way. To this end we replace the smooth production function in a prototypical model of the MTM with heterogeneous plants that adjust output along three nonconvex margins: intermittent production, shiftwork, and weekend work. We calibrate the model such that steady-state utilization of these margins is in line with U.S. data. We find that the nonconvexities dampen the responses of aggregate economic activity and prices to monetary policy shocks by about 50 percent relative to the standard model, thereby significantly reducing the effectiveness of the MTM. Due to heterogeneity and discrete choices at the plant level, monetary policy affects the output decisions of only “marginal†plants – those close to being indifferent between alternative production plans. In equilibrium the measure of such plants is rather small. In addition, contrary to popular belief, the quantitative effects of monetary policy shocks on aggregate output do not significantly change with the degree of capacity utilization over the business cycle. The effects on inflation, however, do change substantially over the business cycle when monetary policy shocks are persistent.
    Keywords: Asymmetries, heterogenous plants, monetary transmission mechanism, nonconvexities, nonlinear approximation.
    JEL: E22 E23 E32 E52
    Date: 2005–12
    Abstract: This 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: 2006–03–28
  5. By: James Albrecht (Georgetown University and IZA Bonn); Lucas Navarro (Queen Mary, University of London); Susan Vroman (Georgetown University and IZA Bonn)
    Abstract: In many economies, there is substantial economic activity in the informal sector, beyond the reach of government policy. Labor market policies, which by definition apply only to the formal sector, can have important spillover effects on the informal sector. The relative sizes of the informal and formal sectors adjust, the skill composition of the workforce in the two sectors changes, etc. In this paper, we build an equilibrium search and matching model to analyze the effects of labor market policies in an economy with an informal sector. Our model extends Mortensen and Pissarides (1994) by allowing for ex ante worker heterogeneity with respect to formal-sector productivity. We analyze the effects of labor market policy on informal- and formal-sector output, on the division of the workforce into unemployment, informal-sector employment and formal-sector employment, and on wages. Finally, our model allows us to examine the distributional implications of labor market policy; specifically, we analyze how labor market policy affects the distributions of wages and productivities across formal-sector matches.
    Keywords: search, matching, informal sector
    JEL: E26 J64 J65 O17
    Date: 2006–05
  6. By: Raouf, BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Fernando, DEL RIO; David, DE LA CROIX (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: We construct a vintage capital model à la Whelan (2002) with both exogenous embodied and disembodied technical progress, and variable utilization of each vintage. The lifetime of capital goods is endogenous and it relies on the associated maintenance costs. We study the properties of the balanced growth paths. First, we show that the lifetime of capital is an increasing (resp. decreasing) function of the rate of disembodied (resp.embodied) technical progress. Second, we show that both the use-related depreciation rate and the scrapping rate incease when embodied technical progress accelerates. However, the latter drops when disembodied technical progress accelerates while the former remains unaffected. A key feature of our model is that the age-related depreciation rate does depend on the obsolescence rate in sharp contrast to the neoclassical model.
    Keywords: Vintage capital; operation costs; embodied technical progress; age-related depreciation; obsolescence
    JEL: E22 E32 O40
    Date: 2006–03–16
  7. By: Alexis, PARMENTIER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: This paper analyzes the effects of the marginal tax rate on unemployment and economic efficiency in a matching model with homogenous agents when wages and working hours are bargained over. I show that the theoretical impact of a higher marginal tax rate on unemployment is ambiguous whatever the instantaneous utility in unemployment i.e. for an utility in unemployment that is either fixed or perfectly indexed on net wages. These results are in sharp contrast with the literature. Numerical simulations applied to France suggest that a higher marginal tax rate generally reduces the unemployment rate but at the expense of lower economic efficiency. The simulations point also out that the relation between the optimal marginal tax rate and the elasticity of labor supply is not monotonic.
    Keywords: Matching model; Marginal Tax Rate; Labor supply; Utility in unemployment
    JEL: D82 H21 H24 J64
    Date: 2006–04–01
  8. By: Jaromir Benes; Tibor Hledik; Michael Kumhof; David Vavra
    Abstract: Since the introduction of the inflation targeting regime in 1998 the Czech National Bank has made considerable progress in developing formal tools for supporting its Forecasting and Policy Analysis System. This paper documents the advances in the ongoing research aimed at developing a DSGE small open economy model designed to capture some of the most important features of the Czech economy—both the business-cycle regularities and the recent developments associated with the economy’s transition and its convergence towards the industrialized European countries. The model in its current form is able to capture trends in relative prices, allow for medium-convergence in expenditure shares, and deal with the undercapitalization and investment inflow issues. Besides the model exhibits real and nominal rigidities that are in line with the recent New Open Economy Macroeconomics literature built fully on first principles. The innovative features of our model include the international currency pricing scheme permitting flexible calibration of import and export price elasticities along with the disconnect of the nominal exchange rate, the policy reaction function with a parameterized forecast horizon, and a generalized capital accumulation equation with imperfect intertemporal substitution of investment.
    Keywords: .
    JEL: C32 E32
    Date: 2005–12
  9. By: Young Jun Chun
    Abstract: This paper evaluates the effects of population aging and fiscal policies on national saving in Korean situation. For the prediction of the national savings rate of Korea for the next several decades, we employ a life-cycle model, which incorporates the generational accounting approach needed to assess the distribution of fiscal burden across generations. We found that the rapid population aging and long-term budgetary imbalance will substantially lower the national savings rate in Korea. A sensitivity analysis based on an alternative model, an altruistic family model, shows that these predictions are robust to the specification of altruism among generations. In addition, the estimation results of consumption functions with respect to various kinds of wealth suggest that the annuitization of wealth due to maturing of public pensions and introduction of reverse annuity mortgage is likely to further decrease the savings rate in the future.
    JEL: H3 H60 E21
    Date: 2006–05

This nep-dge issue is ©2006 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.