nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒08‒12
six papers chosen by
Christian Zimmermann
University of Connecticut

  1. Rejuveniles and Growth By Barnett, Richard; Bhattacharya, Joydeep
  2. Vacancy Size and Offered Wage: A Source of Search Friction in The Japanese Labor Market By Ryo Kambayashi; Yuko Ueno
  3. Financial crises and total factor productivity By Felipe Meza; Erwan Quintin
  4. Demographics and the politics of capital taxation in a life-cycle economy By Mateos-Planas, Xavier
  5. The term structure of interest rates in a DSGE model By Marina Emiris
  6. Using Micro Data to Estimate the Intertemporal Substitution Elasticity for Labor Supply in an Implicit Contract Model By John C. Ham; Kevin T. Reilly

  1. By: Barnett, Richard; Bhattacharya, Joydeep
    Abstract: Rejuveniles are "grown-ups who cultivate juvenile tastes in products and entertainment". In this note, we study a standard AK growth model of overlapping generations populated by rejuveniles. For our purposes, rejuveniles are old agents who derive utility from "keeping up" their consumption with that of the current young. We find that such cross-generational keeping up is capable of generating interesting equilibrium growth dynamics, including growth cycles. No such growth dynamics is possible either in the baseline model, one where no such generational consumption externality exists, or for almost any other form of keeping up. Steady-state growth in a world with rejuveniles may be higher than that obtained in the baseline model.
    Keywords: Growth cycles, keeping up preferences, overlapping generations
    JEL: E0
    Date: 2006–08–05
  2. By: Ryo Kambayashi; Yuko Ueno
    Abstract: Behind rising natural rate of unemployment, they often point out the decline in matching efficiency of the labor market. We empirically examine the cause of matching friction based on the theory of directed search model such as Burdett, Shi and Wright (2001). From rich micro data on vacancy size and wage variation of job changers in Japanese labor market, we observe the negative relationship between vacancy size and offered wage, which show the existence of search friction, not in the whole labor market but in some particular unskilled markets, especially those of clerks and production workers.
    Keywords: Search friction, matching, directed search, vacancy, wage offer, Japan
    JEL: J63 J31 J42
    Date: 2006–08
  3. By: Felipe Meza; Erwan Quintin
    Abstract: Total factor productivity (TFP) falls markedly during financial crises, as we document with recent evidence from Mexico and Asia. These falls are unusual in magnitude and present a difficult challenge for the standard small open economy neoclassical model. We show in the case of Mexico’s 1994-95 crisis that the model predicts that inputs and output should have fallen much more than they did. Using models with endogenous factor utilization, we find that capital utilization and labor hoarding can account for a large fraction of the TFP fall during the crisis. However, these models also predict that output should fall significantly more than in the data. Given the behavior of TFP, the biggest challenge may not be explaining why output falls so much following financial crises, but rather why it falls so little.
    Keywords: Financial crises - Mexico
    Date: 2005
  4. By: Mateos-Planas, Xavier
    Abstract: This paper investigates the consequences of changes in the age composition of the population for the mix of tax rates on labour and capital income when these policies are decided through democratic institutions. The analysis is conducted within a general equilibrium, overlapping-generations model where agents live for many periods, and tax rates are determined through voting by forward looking agents. A version of the model calibrated to the US economic conditions and 1990 age structure is used to study quantitatively the effects of past and projected demographic shifts in the US. The younger voting-age population in 1990 relative to 1965 can account for the large decline in the relative capital tax rate observed between these two years. The older voting-age population expected in 2025 is shown to lead to a sharp increase in capital taxation. These results reflect the tension between the induced changes in the decisive voter's age and in macroeconomic conditions.
  5. By: Marina Emiris (National Bank of Belgium, Research Department)
    Abstract: The paper evaluates the implications of the Smets and Wouters (2004) DSGE model for the US yield curve. Bond prices are modelled in a way that is consistent with the macro model and the resulting risk premium in long term bonds is a function of the macro model parameters exclusively. When the model is estimated under the restriction that the implied average 10-year term premium matches the observed premium, it turns out that risk aversion and habit only need to rise slightly, while the increase in the term premium is achieved by a drop in the monetary policy parameter that governs the aggressiveness of the monetary policy rule. A less aggressive policy increases the persistence of the reaction of inflation and the short interest rate to any shock, reinforces the covariance between the marginal rate of substitution of consumption and bond prices, turns positive the contribution of the inflation premium and drives the term premium up. The paper concludes that by generating persistent inflation the presence of nominal rigidities can help in reconciling the macro model with the yield curve data.
    Keywords: term structure of interest rates, policy rules, risk premia
    JEL: E43 E44 G12
    Date: 2006–07
  6. By: John C. Ham; Kevin T. Reilly
    Abstract: Economists have devoted substantial resources to estimating the intertemporal substitution elasticity for labor supply because this elasticity plays a crucial role in the real business cycle literature. Generally, the estimates of the elasticity have been too low to explain business cycles. Economists have responded by trying to modify real business cycle models to allow for smaller elasticities, but they have experienced mixed success at best. However, the standard intertemporal substitution model has not done well when tested, and if this model is incorrect, so will be the estimated labor supply elasticities based upon it. An equilibrium alternative to the standard intertemporal labor supply model is the implicit contract model. In this latter model firms and workers bargain over state-contingent contracts denominated in terms of consumption and hours of work. Further, the price of leisure is the marginal product of labor or the shadow wage, which differs from the observed wage. A number of studies have found that the data are compatible with an implicit contract model; in particular in Ham and Reilly (2002) we found that we could reject a separable (within period) implicit contract model but not a non-separable one. If an implicit contract model is appropriate, this is the context in which we should try to estimate the intertemporal labor supply elasticity. However this estimation is potentially quite difficult with micro data since the shadow wage (marginal product of labor) is unobserved. In this paper we first develop a procedure that allows one to estimate the intertemporal substitution elasticity in an implicit contract model from micro data. We then implement this procedure using the Panel Study of Income Dynamics (PSID) and the Consumer Expenditure Survey (CES). We obtain statistically significant elasticities of 0.9 with the PSID and 1.0 with the CES. The consistency of the estimate across the data sets is impressive given that we use different estimation approaches (micro data versus synthetic cohorts) and different consumption measures (food consumption versus total nondurable consumption) in the two data sets. These results are three times larger than existing estimates based on the standard intertemporal supply elasticity from this data set and thus offer more hope that equilibrium perspectives on the labor market are capable of tracking the data. Given that the implicit contract model is less likely to be rejected than the standard model in our work and other research, we believe that our approach should prove to be quite useful.
    JEL: E30 J22 J60
    Date: 2006–07

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