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on Dynamic General Equilibrium |
| By: | Kai Philipp Christoffel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Keith Kuester (Goethe University Frankfurt, Senckenberganlage 31, 60054 Frankfurt am Main, Germany.); Tobias Linzert (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We focus on a quantitative assessment of rigid labor markets in an environment of stable monetary policy. We ask how wages and labor market shocks feed into the inflation process and derive monetary policy implications. Towards that aim, we structurally model matching frictions and rigid wages in line with an optimizing rationale in a New Keynesian closed economy DSGE model. We estimate the model using Bayesian techniques for German data from the late 1970s to present. Given the pre-euro heterogeneity in wage bargaining we take this as the first-best approximation at hand for modelling monetary policy in the presence of labor market frictions in the current European regime. In our framework, we find that labor market structure is of prime importance for the evolution of the business cycle, and for monetary policy in particular. Yet shocks originating in the labor market itself may contain only limited information for the conduct of stabilization policy. JEL Classification: E32; E52; J64; C11. |
| Keywords: | Labor market; wage rigidity; bargaining; Bayesian estimation. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060635&r=dge |
| By: | Mariano Kulish (Reserve Bank of Australia); Kathryn Smith (Reserve Bank of Australia); Christopher Kent (Reserve Bank of Australia) |
| Abstract: | This paper studies the macroeconomic consequences of ageing in an overlapping-generations model with endogenous retirement. We study the behaviour of the economy when population ageing is driven by movements in fertility, changes in longevity, and a combination of both. To gauge the economic implications of these demographic changes we calibrate the model to match key features of the Australian economy. With either a fall in fertility or a rise in longevity, population ageing increases capital intensity in the long run. When fertility and longevity operate together, the increase in capital intensity is more than additive, and the share of life spent in retirement stays roughly constant. The dynamic response of the economy is sensitive to the relative strength of the two factors that drive ageing. |
| Keywords: | baby boom; endogenous retirement; longevity; OLG (overlapping generations) |
| JEL: | D91 J13 J26 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2006-06&r=dge |
| By: | Gregory de Walque (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Rafael Wouters (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.) |
| 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. JEL Classification: E1-E3. |
| Keywords: | Inflation persistence; DSGE models. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060648&r=dge |
| By: | Barbara Annicchiarico (Department of Economics, University of Rome ‘Tor Vergata’, Via Columbia 2, 00133 Rome, Italy.); Nicola Giammarioli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alessandro Piergallini (Department of Economics, University of Rome ‘Tor Vergata’, Via Columbia 2, 00133 Rome, Italy.) |
| Abstract: | This paper develops a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite lifetimes. The framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. When calibrated to euro area quarterly data, the model predicts that fiscal expansions generate a tradeoff in output dynamics between short-term gains and medium-term losses. It is also shown that the effects of fiscal shocks crucially depend upon the conduct of monetary policy. Simulation analysis suggests that balanced-budget requirements enhance the determinacy properties of feedback interest rate rules by guaranteeing inflation stabilization. JEL Classification: E52, E58, E63. |
| Keywords: | Fiscal Policy, Monetary Policy, Nominal Rigidities, Capital Accumulation, Finite Lifetime, Simulations. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060661&r=dge |
| By: | Jean-Pascal Bénassy |
| Abstract: | Many recent discussions on the conduct of monetary policy through interest rate rules have given a very central role to inflation, both as an objective and as an intermediate instrument. We want to show that other variables like employment can be as important or even more. For that we construct a dynamic stochastic general equilibrium (DSGE) model where the economy is subject to demand and supply shocks. We compute closed form solutions for the optimal interest rate rules and find that they can be function of employment only, which then dominates inflation for use in the policy rule. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2006-20&r=dge |
| By: | Klaus Adam (Corresponding author: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Roberto M. Billi (Federal Reserve Bank of Kansas City, 925 Grand Blvd, Kansas City, MO 64198, United States.) |
| Abstract: | Does an inflation conservative central bank à la Rogoff (1985) remain desirable in a setting with endogenous fiscal policy? To provide an answer we study monetary and fiscal policy games without commitment in a dynamic stochastic sticky price economy with monopolistic distortions. Monetary policy determines nominal interest rates and fiscal policy provides public goods generating private utility. We find that lack of fiscal commitment gives rise to excessive public spending. The optimal inflation rate internalizing this distortion is positive, but lack of monetary commitment robustly generates too much inflation. A conservative monetary authority thus remains desirable. Exclusive focus on inflation by the central bank recoups large part - in some cases all - of the steady state welfare losses associated with lack of monetary and fiscal commitment. An inflation conservative central bank tends to improve also the conduct of stabilization policy. JEL Classification: E52, E62, E63. |
| Keywords: | Banking, sequential non-cooperative policy games, discretionary policy, time consistent policy, conservative monetary policy. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060663&r=dge |
| By: | Suleyman Basak (London Business School and CEPR, Institute of Finance and Accounting); David Cass; Juan Manuel Licari; Anna Pavlova |
| Abstract: | This paper explores the role of portfolio constraints in generating multiplicity of equilibrium. We present a simple financial market economy with two goods and two households, households who face constraints on their ability to take unbounded positions in risky stocks. Absent such constraints, equilibrium allocation is unique and is Pareto efficient. With one portfolio constraint in place, the efficient equilibrium is still possible; however, additional inefficient equilibria in which the constraint is binding may emerge. We show further that with portfolio constraints cum incomplete markets, there may be a continuum of equilibria; adding incomplete markets may lead to real indeterminacy. |
| Keywords: | Multiple equilibria, asset pricing, portfolio constraints, indeterminacy, financial equilibrium |
| JEL: | G12 D52 |
| Date: | 2006–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:06-020&r=dge |
| By: | Dilip Mokherjee (Department of Economics, Boston University); Stefan Napel (Department of Economics, University of Hamburg) |
| Abstract: | That historical inequality can affect long run macroeconomic performance has been argued by a large literature on ‘endogenous inequality’ using models of indivisibilities in occupational choice, in the presence of borrowing constraints. These models are characterized by a continuum of steady states, and absence of mobility in any steady state. We augment such a model with heterogeneity in agents’ abilities in order to generate occupational mobility in steady state. Steady states with mobility are shown to be generically locally unique and finite in number. We provide forms of heterogeneity for which steady state is globally unique, and others where they are non-unique. Agent heterogeneity may also cause competitive equilibrium dynamics to fail to converge, but convergence can be restored in the presence of sufficient ‘inertia’ or occupation switching costs. |
| Keywords: | Intergenerational mobility, occupational choice, human capital, borrowing constraints, inequality, history-dependence |
| JEL: | D31 D91 E25 I21 J24 O11 O15 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp1&r=dge |