nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒07‒21
six papers chosen by
Christian Zimmermann
University of Connecticut

  1. Convergence in a Stochastic Dynamic Heckscher-Ohlin Model By Partha Chatterjee; Malik Shukayev
  2. Expectations, Learning and Macroeconomic Persistence By Fabio Milani
  3. Leisure Externalities: Implications for Growth and Welfare By Mihaela Pintea
  4. Reconsidering The Impact of Environment on Long-Run Growth When Pollution Influences Health and Agents Have Finite-Lifetime By Xavier Pautrel
  5. Plant Life Cycle and Aggregate Employment Dynamics By Min Ouyang
  6. Is Discrete Time a Good Representation of Continuous Time? By Luis A. Puch; Omar Licandro

  1. By: Partha Chatterjee; Malik Shukayev
    Abstract: The authors characterize the equilibrium for a small economy in a dynamic Heckscher-Ohlin model with uncertainty. They show that, when trade is balanced period-by-period, the per capita output and consumption of a small open economy converge to an invariant distribution that is independent of the initial wealth. Further, at the invariant distribution, with probability one there are some periods in which the small economy diversifies. These results are in sharp contrast with those of deterministic dynamic Heckscher-Ohlin models, in which permanent specialization and non-convergence occur. One key feature of the authors' model is the presence of market incompleteness as a result of the period-by-period trade balance. The importance of market incompleteness, and not just uncertainty, in achieving the authors' results is illustrated through an analytical example. Further, numerical simulations show that the convergence occurs more quickly as the magnitude of the shocks increases. Thus, the results extend the predictions of income convergence, standard in one-sector neoclassical growth models, to the dynamic multicountry Heckscher-Ohlin environment.
    Keywords: Economic models
    JEL: F43 O41
    Date: 2006
  2. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper presents an estimated model with learning and provides evidence that learning can improve the fit of popular monetary DSGE models and endogenously generate realistic levels of persistence. The paper starts with an agnostic view, developing a model that nests learning and some of the structural sources of persistence, such as habit formation in consumption and inflation indexation, that are typically needed in monetary models with rational expectations to match the persistence of macroeconomic variables. I estimate the model by likelihood-based Bayesian methods, which allow the estimation of the learning gain coefficient jointly with the "deep" parameters of the economy. The empirical results show that when learning replaces rational expectations, the estimated degrees of habits and indexation drop near zero. This …nding suggests that persistence arises in the model economy mainly from expectations and learning. The posterior model probabilities show that the specification with learning fits significantly better than does the specification with rational expectations. Finally, if learning rather than mechanical sources of persistence provides a more appropriate representation of the economy, the implied optimal policy will be different. The policymaker will also incur substantial costs from misspecifying private expectations formation.
    Keywords: Persistence, Constant-gain learning, Expectations, Habit formation in consumption, Inflation inertia; Phillips curve; Bayesian econometrics; New-Keynesian model.
    JEL: C11 D84 E30 E50 E52
    Date: 2005–08
  3. By: Mihaela Pintea (Department of Economics, Florida International University)
    Abstract: This paper develops a neoclassical growth model with leisure externalities. Ignoring positive (negative) leisure externalities leads to equilibrium consumption, labor and capital that are too high (low) and leisure that is too low (high). The government should tax (subsidize) labor income according to whether the leisure externality is positive or negative. The level of this tax (subsidy) depends on the elasticity of individual and average leisure and the consumption tax. Equilibrium dynamics are characterized, and two shocks to the economy are analyzed – an increase in the growth rate of labor productivity, and an increase in the tax on labor income – by simulating a calibrated economy. Adjustment processes of key variables in a competitive and centrally planned economy with and without leisure externalities are also compared.
    Keywords: externalities, transitional dynamics, economic growth
    JEL: D91 O40
    Date: 2006–07
  4. By: Xavier Pautrel (Université de Nantes)
    Abstract: Using an overlapping generation model à la Blanchard (1985) with human capital accumulation, this article demonstrates that the influence of environment on optimal growth in the long-run may be explained by the detrimental effect of pollution on life expectancy. It also shows that, in such a case, greener preferences are growth- and welfare-improving even if the ability of the agents to learn is independent to pollution and utility is additively separable. Finally, it establishes that it is possible to implement a win-win environmental policy.
    Keywords: Growth, Environment, Overlapping Generations, Human Capital, Health
    JEL: E62 I21 O41 Q28
    Date: 2006–06
  5. By: Min Ouyang (Department of Economics, University of California-Irvine)
    Abstract: Past empirical studies have repeatedly found the link between plant life cycle and aggregate employment dynamics: cross-section aggregate employment dynamics differ significantly by plant age. Interestingly, the dynamics of plant-level productivity distribution also display a strong age pattern. This paper develops a model of plant life cycle with demand fluctuations, to capture both of these empirical regularities. We model plants to differ by vintage, and an idiosyncratic component that is not directly observable, but can be learned over time. We show that this model, developed to match the observed dynamics of plant-level productivity distribution, introduces two driving forces for job flows: learning and creative destruction. The resulting job flows can match, both qualitatively and quantitatively, the differences between young and old plants in their job-flow magnitude and cyclical responses observed in the U.S. manufacturing sector.
    Keywords: Plant life cycle; Employment dynamics; Heterogeneous employers; Job creation; Job destruction; Productivity dynamics; Demand fluctuations
    JEL: E32 L16 C61
    Date: 2006–07
  6. By: Luis A. Puch; Omar Licandro
    Abstract: Economists model time as continuous or discrete. The recent literature on continuous time models with delays should help to bridge the gap between these two families of models. In this note, we propose a simple time--to--build model in continuous time, and show that a discrete time version is a true representation of the continuous time problem under some sufficient conditions.

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