nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒07‒02
six papers chosen by
Christian Zimmermann
University of Connecticut

  1. Lumpy Investment in Dynamic General Equilibrium By Ruediger Bachmann; Ricardo J. Caballero; Eduardo Engel
  2. A New-Open-Economy Macro Model for Fiscal Policy Evaluation By Dennis P. J. Botman; Dirk Muir; Andrei Romanov; Douglas Laxton
  3. High Inflation and Real Wages By Benedikt Braumann
  4. Upper Bounds on Numerical Approximation Errors By Raahauge, Peter
  5. How Different Is the Cyclical Behavior of Home Production Across Countries? By M. Ayhan Kose; William Blankenau
  6. Time consistent monetary policy with endogenous price rigidity By Siu, Henry

  1. By: Ruediger Bachmann (Yale University); Ricardo J. Caballero (MIT); Eduardo Engel (Cowles Foundation, Yale University)
    Abstract: Microeconomic lumpiness matters for macroeconomics. According to our DSGE model, it explains roughly 60% of the smoothing in the investment response to aggregate shocks. The remaining 40% is explained by general equilibrium forces. The central role played by micro frictions for aggregate dynamics results in important history dependence in business cycles. In particular, booms feed into themselves. The longer an expansion, the larger the response of investment to an additional positive shock. Conversely, a slowdown after a boom can lead to a long lasting investment slump, which is unresponsive to policy stimuli. Such dynamics are consistent with US investment patterns over the last decade. More broadly, over the 1960-2000 sample, the initial response of investment to a productivity shock with responses in the top quartile is 60% higher than the average response in the bottom quartile. Furthermore, the reduction in the relative importance of general equilibrium forces for aggregate investment dynamics also facilitates matching conventional RBC moments for consumption and employment.
    Keywords: Ss model, RBC model, Time-varying impulse response function, Aggregate shocks, Sectoral shocks, Idiosyncratic shocks, Adjustment costs, History dependence, Moment matching
    JEL: E10 E22 E30 E32 E62
    Date: 2006–06
  2. By: Dennis P. J. Botman; Dirk Muir; Andrei Romanov; Douglas Laxton
    Abstract: We develop a New-Open-Economy-Macro model in which Ricardian equivalence does not hold because of (i) distortionary labor and corporate income taxation; (ii) limited asset market participation; and (iii) because the overlapping-generations structure results in a disconnect between current and future generations. We consider a permanent increase in government debt following a cut in labor or corporate income taxes in a small and large open economy. We analyze the sensitivity of the results to the key structural parameters of the model and argue that under plausible assumptions there will be significant crowding-out effects associated with permanent increases in government debt.
    Keywords: Fiscal policy , Taxes , Public debt , Economic models ,
    Date: 2006–02–28
  3. By: Benedikt Braumann
    Abstract: Empirical data show that real wages fall sharply during periods of high inflation. This paper suggests a simple general equilibrium explanation, without relying on nominal rigidities. It presents an intertemporal two-sector model with a cash-in-advance constraint. In this setting, inflation reduces real wages through (1) a decline of the capital stock, and (2) a shift in relative prices. The two effects are additive and make the decline in real wages exceed the decline in per-capita GDP. This mechanism may contribute to rising poverty during periods of high inflation.
    Keywords: Inflation , Wages , Poverty , Economic models ,
  4. By: Raahauge, Peter (Department of Finance, Copenhagen Business School)
    Abstract: This paper suggests a method for determining rigorous upper bounds on approximation errors of numerical solutions to infinite horizon dynamic programming models. Bounds are provided for approximations of the value function and the policy function as well as the derivatives of the value function. The bounds apply to more general problems than existing bounding methods do. For instance, since strict concavity is not required, linear models and piecewise linear approximations can be dealt with. Despite the generality, the bounds perform well in comparison with existing methods even when applied to approximations of a standard(strictly concave)growth model.
    Keywords: Numerical approximation errors; Bellman contractions; Error bounds
    JEL: G00
    Date: 2006–06–21
  5. By: M. Ayhan Kose; William Blankenau
    Abstract: This paper studies stylized business cycle properties of household production in four industrialized countries (Canada, the United States, Germany, and Japan). We employ a dynamic small open economy business cycle model that incorporates a household production sector. We use the model to generate data on home output, hours worked in the home sector, and hours spent on leisure. We find that in each country, home output is more volatile than market output while home sector hours are about as volatile as those in the market sector. In each country, leisure is the least volatile series. Leisure hours and home hours are countercyclical in all countries, and home output is not highly correlated with market output. Home sector variables are generally less persistent than market variables, and cross-country correlations related to home production tend to be lower than those related to market production. These findings demonstrate that despite some well-known structural differences in labor markets, the cyclical features of home sector variables are similar across the countries we consider.
    Keywords: Business cycles , Canada , United States , Germany , Japan , Production , Labor markets , Economic models ,
    Date: 2006–02–28
  6. By: Siu, Henry
    Abstract: In this paper I characterize time consistent equilibrium in an economy with price rigidity and an optimizing monetary authority operating under discretion. Firms have the option to increase their frequency of price change, at a cost, in response to higher inflation. Previous studies, which assume a constant degree of price rigidity across inflation regimes, find two time consistent equilibria - one with low inflation, the other with high inflation. In contrast, when price rigidity is endogenous, the high inflation equilibrium ceases to exist. Hence, time consistent equilibrium is unique. This result depends on two features of the analysis: (1) a plausible quantitative specification of the fixed cost of price change, and (2) the presence of an arbitrarily small cost of inflation that is independent of price rigidity.
    JEL: E31 E52 E61
    Date: 2006–06–15

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