nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒09‒03
ten papers chosen by
Christian Zimmermann
University of Connecticut

  1. Social Security and Intergenerational Redistribution By Bhattacharya, Joydeep; Reed, Robert
  2. Competition, Innovation and Growth with Limited Commitment By Ramon Marimon; Vincenzo Quadrini
  3. On the Usefulness of the Constrained Planning Problem in a Model of Money By Bhattacharya, Joydeep; Singh, Rajesh
  4. Optimal Monetary Policy with Collateralized Household Debt and Borrowing Constraints By Tommaso Monacelli
  5. Capital Deepening and Non-Balanced Economic Growth By Daron Acemoglu; Veronica Guerrieri
  6. Modern Macroeconomics in Practice: How Theory is Shaping Policy By Patrick Kehoe; Varadarajan V. Chari
  7. Double Dividend Hypothesis, Golden Rule and Welfare Distribution By Mireille Chiroleu-Assouline; Mouez Fodha
  8. The Equity Premium Implied by Production By Urban Jermann
  9. A Theory of Demand Shocks By Guido Lorenzoni
  10. Double Dividend with Involuntary Unemployment: <br />Efficiency and Intergenerational Equity By Mireille Chiroleu-Assouline; Mouez Fodha

  1. By: Bhattacharya, Joydeep; Reed, Robert
    Abstract: Many countries around the world have large public pension programs with significant cross-cohort redistribution. This paper provides a rationale for such programs in a lifecycle framework with search and matching frictions in the labor market. In the model, public pension programs alter the age composition of the labor force by inducing the jobless elderly to retire. This improves the allocation of workers to jobs, raises firm entry and may also improve welfare. By requiring a long history of labor market attachment as a precondition to receiving benefits, these programs raise the future value of current employment for the young. This redistributes bargaining strength and income from the young to the old.
    Keywords: Search, labor market efficiency, unemployment, lifecycle, pensions
    JEL: E0
    Date: 2006–08–23
  2. By: Ramon Marimon; Vincenzo Quadrini
    Abstract: We study how barriers to competition---such as restrictions to business start-up and strict enforcement of covenants or IPR---affect the investment in knowledge capital when contracts are not enforceable. These barriers lower the competition for human capital and reduce the incentive to accumulate knowledge. We show in a dynamic general equilibrium model that this mechanism has the potential to account for significant cross-country income inequality.
    JEL: L14 L16 O4
    Date: 2006–08
  3. By: Bhattacharya, Joydeep; Singh, Rajesh
    Abstract: In this paper, we study a decentralized monetary economy with a specified set of markets, rules of trade, an equilibrium concept, and a restricted set of policies and derive a set of equilibrium (monetary) allocations. Next we set up a simpler constrained planning problem in which we restrict the planner to choose from a set that contains the set of equilibrium allocations in the decentralized economy. If there is a government policy that allows the decentralized economy to achieve the constrained planner's allocation, then it is the optimal policy choice. To illustrate the power of such analyses, we solve such planning problems in three monetary environments with limited communication. The upshot is that solving constrained planning problems is an extremely "efficient" (easy and quick) way of deriving optimal policies for the corresponding decentralized economies.
    Keywords: planning problems, overlapping generations, random relocation model
    JEL: E4
    Date: 2006–08–23
  4. By: Tommaso Monacelli
    Abstract: We study optimal monetary policy in an economy with nominal private debt, borrowing constraints and price rigidity. Private debt reflects equilibrium trade between an impatient borrower, who faces an endogenous collateral constraint, and a patient saver, who engages in consumption smoothing. Since inflation can positively affect borrower's net worth, monetary policy optimally balances the incentive to offset the price stickiness distortion with the one of marginally relaxing the borrower's collateral constraint. We find that the optimal volatility of inflation is increasing in three key parameters: (i) the borrower's weight in the planner's objective function; (ii) the borrower's impatience rate; (iii) the degree of price flexibility. In general, however, deviations from price stability are small for a small degree of price stickiness. In a two-sector version of our model, in which durable price movements can directly affect the ability of borrowing, the optimal volatility of (non-durable) inflation is more sizeable. In our context, and relative to simple Taylor rules, the Ramsey-optimal allocation entails a partial smoothing of real durable goods prices.
    JEL: E24 E44 E5
    Date: 2006–08
  5. By: Daron Acemoglu; Veronica Guerrieri
    Abstract: This paper constructs a model of non-balanced economic growth. The main economic force is the combination of differences in factor proportions and capital deepening. Capital deepening tends to increase the relative output of the sector with a greater capital share, but simultaneously induces a reallocation of capital and labor away from that sector. We first illustrate this force using a general two-sector model. We then investigate it further using a class of models with constant elasticity of substitution between two sectors and Cobb-Douglas production functions in each sector. In this class of models, non-balanced growth is shown to be consistent with an asymptotic equilibrium with constant interest rate and capital share in national income. We also show that for realistic parameter values, the model generates dynamics that are broadly consistent with US data. In particular, the model generates more rapid growth of employment in less capital-intensive sectors, more rapid growth of real output in more capital-intensive sectors and aggregate behavior in line with the Kaldor facts. Finally, we construct and analyze a model of “non-balanced endogenous growth,” which extends the main results of the paper to an economy with endogenous anddirected technical change. This model shows that equilibrium will typically involve endogenous non-balanced technological progress.
    JEL: O30 O40 O41
    Date: 2006–08
  6. By: Patrick Kehoe; Varadarajan V. Chari
    Abstract: Theoretical advances in macroeconomics made in the last three decades have had a major influence on macroeconomic policy analysis. Moreover, over the last several decades, the United States and other countries have undertaken a variety of policy changes that are precisely what macroeconomic theory of the last 30 years suggests. The three key developments that have shaped macroeconomic policy analysis are the Lucas critique of policy evaluation due to Robert Lucas, the time inconsistency critique of discre-tionary policy due to Finn Kydland and Edward Prescott, and the development of quantitative dynamic stochastic general equilibrium models following Finn Kydland and Edward Prescott.
    JEL: E21 E4 E43 E5 E52 E58 E6 E62 E65 H2 H25 H3
    Date: 2006–08
  7. By: Mireille Chiroleu-Assouline (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Mouez Fodha (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: This paper analyzes the double dividend issues within the framework of overlapping generations models. We characterize the necessary conditions for obtaining a double dividend, i.e. an improvement of environmental and non-environmental welfare when the revenue from the pollution tax is recycled into a change in the labor tax rate. We show that, depending on the initial capital stock and on the intertemporal elasticity of substitution, conditions may be defined to simultaneously allow (i) the obtaining of a long term double dividend, (ii) the economy to move closer to the modified golden rule and (iii) in the short term, an improvement in the welfare of the two present generations.
    Keywords: Environmental tax; Overlapping generations model; Golden rule; Double dividend
    Date: 2006–08–24
  8. By: Urban Jermann
    Abstract: This paper studies the determinants of the equity premium as implied by producers’ first-order conditions. A closed form expression is presented for the Sharpe ratio at steady-state as a function of investment volatility and adjustment cost curvature. Calibrated to the U.S. postwar economy, the model can generate a sizeable equity premium, with reasonable volatility for market returns and risk free rates. The market’s Sharpe ratio and the market price of risk are very volatile. Contrary to most models, the model generates a negative correlation between conditional means and standard deviations of aggregate excess returns.
    JEL: E23 G12
    Date: 2006–08
  9. By: Guido Lorenzoni
    Abstract: This paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity. Agents are hit by heterogeneous productivity shocks, they observe their own productivity and a noisy public signal regarding aggregate productivity. The shock to this public signal, or "news shock," has the features of an aggregate demand shock: it increases output, employment and inflation in the short run and has no effects in the long run. The dynamics of the economy following an aggregate productivity shock are also affected by the presence of imperfect information: after a productivity shock output adjusts gradually to its higher long-run level, and there is a temporary negative effect on inflation and employment. A calibrated version of the model is able to generate realistic amounts of short-run volatility due to demand shocks, in line with existing time-series evidence. The paper also develops a simple method to solve forward-looking models with dispersed information.
    JEL: D58 D84 E32 E40
    Date: 2006–08
  10. By: Mireille Chiroleu-Assouline (EUREQ - Equipe Universitaire de Recherche en Economie Quantitative - [Université Panthéon-Sorbonne - Paris I]); Mouez Fodha (EUREQ - Equipe Universitaire de Recherche en Economie Quantitative - [Université Panthéon-Sorbonne - Paris I])
    Abstract: This paper analyzes the double dividend and distributional issues within an overlapping <br />generations models framework with involuntary unemployment. We characterize <br />the necessary conditions for the obtention of a double dividend when the revenue of <br />the environmental tax is recycled by a variation of the labor tax rate. We show that an <br />employment dividend may occur without any efficiency dividend and that the young <br />generation is not always harmed by the fiscal reform, even without any<br /> intergenerational transfers. Therefore, three dividends <br />(environmental, efficiency and intergenerational equity) can simultaneously occur.
    Keywords: Environmental tax; Intergenerational equity; <br />Unemployment; Double dividend
    Date: 2006–08–24

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