nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒06‒24
eleven papers chosen by
Christian Zimmermann
University of Connecticut

  1. Monetary Policy in an Estimated DSGE Model with a Financial Accelerator By Ian Christensen; Ali Dib
  2. Firm-specific production factors in a DSGE model with Taylor price setting By Gregory de Walque; Frank Smets; Raf Wouters
  3. IS-LM and the multiplier: A dynamic general equilibrium model. By Jean-Pascal Bénassy
  4. Income Inequality in a Job-Search Model With Heterogeneous Discount Factors (Revised Version, Forthcoming 2006, Revista Economia) By Rubens Penha Cysne
  5. Collateralized Borrowing and Life-Cycle Portfolio Choice By Paul Willen; Felix Kubler
  6. Optimal monetary policy in Markov-switching models with rational expectations agents By Andrew P Blake; Fabrizio Zampolli
  7. Working Time over the 20th Century By Alexander Ueberfeldt
  8. Financial Innovations and Macroeconomic Volatility By Urban Jermann; Vincenzo Quadrini
  9. Wealth Accumulation and Growth in a Specific-Factors Model of Trade and Finance. By Petrucci, Alberto
  10. Ricardian equivalence and the intertemporal Keynesian multiplier. By Jean-Pascal Bénassy
  11. How occupied France financed its own exploitation in World War II. By Filippo Occhino; Kim Oosterlinck; Eugène N. White

  1. By: Ian Christensen; Ali Dib
    Abstract: The authors estimate a sticky-price dynamic stochastic general-equilibrium model with a financial accelerator, à la Bernanke, Gertler, and Gilchrist (1999), to assess the importance of financial frictions in the amplification and propagation of the effects of transitory shocks. Structural parameters of two models, one with and one without a financial accelerator, are estimated using a maximum-likelihood procedure and post-1979 U.S. data. The estimation and simulation results provide some quantitative evidence in favour of the financial-accelerator model. The financial accelerator appears to play an important role in investment fluctuations, but its importance for output depends on the nature of the initial shock.
    Keywords: Business fluctuations and cycles; Economic models; Econometric and statistical methods
    JEL: E32 E37 E44
    Date: 2006
  2. By: Gregory de Walque (National Bank of Belgium, Research Department); Frank Smets (ECB, CEPR and University of Ghent); Raf Wouters (National Bank of Belgium, Research Department)
    Abstract: This paper compares the Calvo model with a Taylor contracting model in the context of the Smets-Wouters (2003) Dynamic Stochastic General Equilibrium (DSGE) model. In the Taylor price setting model, we introduce firm-specific production factors and discuss how this assumption can help to reduce the estimated nominal price stickiness. Furthermore, we show that a Taylor contracting model with firm-specific capital and sticky wage and with a relatively short price contract length of four quarters is able to outperform, in terms of empirical fit, the standard Calvo model with homogeneous production factors and high nominal price stickiness. In order to obtain this result, we need very large real rigidities either in the form of a huge (constant) elasticity of substitution between goods or in the form of an elasticity of substitution that is endogenous and very sensitive to the relative price.
    Keywords: Inflation persistence, DSGE models
    JEL: E1 E3
    Date: 2006–06
  3. By: Jean-Pascal Bénassy
    Abstract: We construct in this paper a dynamic general equilibrium model which displays the central features of the IS-LM model, and notably an income multiplier greater than one, so that crowding out does not occur. It appears that the key to this result is the conjunction of two features of our model: price rigidities (as is usually expected), but also a non-Ricardian economy.
    Date: 2006
  4. By: Rubens Penha Cysne (EPGE/FGV)
    Date: 2006–01
  5. 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.
    JEL: G11 D14
    Date: 2006–06
  6. By: Andrew P Blake; Fabrizio Zampolli
    Abstract: In this paper we consider the optimal control problem of models with Markov regime shifts and forward-looking agents. These models are very general and flexible tools for modelling model uncertainty. An algorithm is devised to compute the solution of a linear rational expectations model with random parameters or regime shifts. This algorithm can also be applied in the optimisation of any arbitrary instrument rule. A second algorithm computes the time-consistent policy and the resulting Nash-Stackelberg equilibrium. Similar methods can be easily employed to compute the optimal policy under commitment. Furthermore, the algorithms can also handle the case in which the policymaker and the private sector hold different beliefs. We apply these methods to compute the optimal (non-linear) monetary policy in a small open economy subject to random structural breaks in some of its key parameters.
  7. By: Alexander Ueberfeldt
    Abstract: From 1870 to 2000, the workweek length of employed persons decreased by 41 per cent in industrialized countries. The employment rate, employment per working age person, displays large movements but no clear secular pattern. This motivated the question: What accounts for the large decrease in the workweek length and developments in the employment rate over the past 130 years? The answer is given in a dynamic general-equilibrium model with supervisory and production workers. Over time, both types of workers become more productive. In a calibrated version of the model, productivity gains of supervisors account for a large fraction of the decline in the workweek length in Japan, the United Kingdom, and the United States. The model, augmented to include taxes, government spending, and technological progress, captures the movement in the employment rates of the three countries.
    Keywords: Economic models; Labour markets; Productivity
    JEL: E13 E24 O11
    Date: 2006
  8. By: Urban Jermann; Vincenzo Quadrini
    Abstract: The volatility of US business cycle has declined during the last two decades. During the same period the financial structure of firms has become more volatile. In this paper we develop a model in which financial factors play a key role in generating economic fluctuations. Innovations in financial markets allow for greater financial flexibility and generate a lower volatility of output together with a higher volatile in the financial structure of firms.
    JEL: E3 G1 G3
    Date: 2006–06
  9. By: Petrucci, Alberto
    Abstract: This paper investigates the allocative properties of an OLG specificfactors small open economy facing perfect capital mobility. Wealth formation, economic development and different labor market regimes are at the center-stage of the analysis. In a model with competitive wages and no unemployment, we find that exogenous shocks that do not affect human wealth —like the terms of trade and land endowment shifts— or the propensity to save, leave nonhuman wealth, consumption and aggregate labor unchanged; in such cases, capital formation is driven by the static effects exerted on sectoral labor. Disturbances that alter human wealth —like the world interest rate, and capital and labor taxation shocks— or the thrift rate, instead, affect nonhuman wealth and consumption as they involve an intergenerational redistribution of resources that modifies aggregate saving; labor hours supplied may be changed. In these circumstances, capital accumulation is the result of the consequences exerted on financial wealth and input demands. The consideration of a labor market with structural unemployment does not qualitatively affect the results, except for the world interest rate and the rate of time discount shifts. Our results differ substantially from those obtained in static and dynamic specific-factors setups with financial autharky.
    Keywords: Specific-Factors; Capital Accumulation; Land; Net Foreign Assets; Finite Horizons.
    JEL: F41 F43 O41
    Date: 2006–06–16
  10. By: Jean-Pascal Bénassy
    Abstract: We show that Keynesian multiplier effects can be obtained in dynamic optimizing models if one combines both price rigidities and a "non Ricardian" framework where, due for example to the birth of new agents, Ricardian equivalence does not hold.
    Date: 2006
  11. By: Filippo Occhino (Department of Economics, Rutgers University, New Brunswick.); Kim Oosterlinck (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.); Eugène N. White (Department of Economics, Rutgers University, New Brunswick.)
    Abstract: The occupation payments made by France to Nazi Germany between 1940 and 1944 represent one of the largest recorded international transfers and contributed significantly to financing the overall German war effort. Using a neoclassical growth model that incorporates essential features of the occupied economy and the postwar stabilization, we assess the welfare costs of French policies that funded payments to Germany. Occupation payments required a 16 percent reduction of consumption for twenty years, with the draft of labor to Germany and wage and price controls adding substantially to this burden. Vichy’s postwar debt overhang would have demanded large budget surpluses; but inflation, which erupted after Liberation, reduced the debt well below its steady state level and redistributed the adjustment costs. The Marshall Plan played only a minor direct role, and international credits helped to substantially lower the nation’s burden.
    Keywords: World War Two, France, Macroeconomy, Economic History, Exploitation.
    JEL: E1 E6 N1 N4
    Date: 2006–03

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