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on Dynamic General Equilibrium |
| By: | Guido Cazzavillan (Department of Economics, University Of Venice Cà Foscari); Patrik Pintus (Universitè de la Mèditerranée and GREQAM-IDEP, France) |
| Abstract: | This paper explores how the occurrence of local indeterminacy and endogenous business cycles relates to dynamic inefficiency, as defined by Malinvaud (1953), Phelps (1965) and Cass (1972). We follow Reichlin (1986) and Grandmont (1993) by considering a two-period OLG model of capital accumulation with labor-leisure choice into the first-period of agents’ life and consumption in both periods. We first show that local indeterminacy and Hopf bifurcation are necessarily associated with a capital-labor ratio that is, at steady state, larger than the Golden Rule level. Consequently, paths converging asymptotically towards the steady state are shown to be dynamically inefficient, as there always exists another trajectory that starts with the same initial conditions and produces more aggregate consumption at all future dates. More surprising, however, is our main result showing that stable orbits, generated around a dynamically inefficient steady state through a supercritical Hopf bifurcation, may, in contrast, be dynamically efficient. |
| Keywords: | Overlapping generations, endogenous labor supply, multiple equilibria, endogenous fluctuations, dynamic inefficiency |
| JEL: | C62 D61 E32 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:37_06&r=dge |
| By: | Rajeev Dhawan; Karsten Jeske |
| Abstract: | So far, the literature on dynamic stochastic general equilibrium models with energy price shocks uses energy on the production side only. In these models, energy shocks are responsible for only a negligible share of output fluctuations. We study the robustness of this finding by explicitly modeling private consumption of energy at the household level in addition to energy use at the firm level to account for total energy use in the economy. Additionally, we distinguish between investment in consumer durables and investment in capital goods. The model economy is calibrated to match total energy use and durable goods consumption as observed in the U.S. data. Simulation results indicate that, despite higher total energy use, this economy has an even smaller proportion of output fluctuations attributable to energy price shocks. Productivity shocks continue to be the primary force behind business cycle fluctuations. The driving force behind our results is that the household now has the flexibility to rebalance its investment portfolio. Specifically, the energy price hike is absorbed by reducing durable goods investment more than investment in capital goods, thereby cushioning the hit to future production at the expense of current consumption. Hence, our model better matches the consumption volatility observed in the data. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-09&r=dge |
| By: | Antonia Diaz; Maria J. Luengo-Prado |
| Abstract: | This paper studies the determinants of housing tenure choice and the differences in the cost of housing services across households in an overlapping generations model with household-specific uninsurable earnings risk and housing prices that vary over time. We model houses as illiquid assets that provide collateral for loans. To analyze the impact of preferential housing taxation on the tenure choice, we consider a tax system that mimics that of the U.S. economy in a stylized way. We find that a mixture of idiosyncratic earnings uncertainty, house price risk, down payments and transaction costs are needed for the model to deliver life cycle patterns of homeownership and portfolio composition similar to those found in the data. Through simulations, we also show that a rental equivalence approach (relative to a user cost approach) overestimates the mean unit cost of housing by approximately 3 percent. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we065421&r=dge |
| By: | Volker Grossmann (University of Fribourg, CESifo and IZA Bonn); Panu Poutvaara (University of Helsinki, CESifo and IZA Bonn) |
| Abstract: | Altruistic parents may transfer resources to their offspring by providing education, and by leaving bequests. We show that in the presence of wage taxation, a small bequest tax may improve efficiency in an overlapping-generations framework with only intended bequests, by enhancing incentives of parents to invest in their children’s education. This result holds even if the wage tax rate is held constant when introducing bequest taxation. We also calculate an optimal mix of wage and bequest taxes with alternative parameter combinations. In all cases, the optimal wage tax rate is clearly higher than the optimal bequest tax rate, but the latter is generally positive when the required government revenue in the economy is sufficiently high. |
| Keywords: | bequest taxation, bequests, education, Pareto improvement |
| JEL: | H21 H31 D64 I21 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2277&r=dge |
| By: | Hui He; Zheng Liu |
| Abstract: | Wage inequality between education groups in the United States has increased substantially since the early 1980s. The relative quantity of college-educated workers has also increased dramatically in the postwar period. This paper presents a unified framework where the dynamics of both skill accumulation and wage inequality arise as an equilibrium outcome driven by measured investment-specific technological change. Working through capital-skill complementarity and endogenous skill accumulation, the model is able to account for much of the observed changes in the relative quantity of skilled workers. The model also does well in replicating the observed rise in wage inequality since the early 1980s. Based on the calibrated model, we examine the quantitative effects of some hypothetical tax-policy reforms on skill formation, inequality, and welfare. |
| Keywords: | Wages |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:644&r=dge |
| By: | Santiago Budria; Antonia Diaz |
| Abstract: | In this paper we investigate the size of the risk premium and the term premium in an representative agent exchange model economy where households preferences are subject to habit formation. As a novel feature, we develop theoretical measures for risk premium and term premium that can be used even when the consumption growth process is serially autocorrelated. We find that habit formation increases risk aversion significantly but increases much more the aversion to variations of consumption across dates. This induces a substantial increase in the precautionary demand of short term assets and a significant fall in the precautionary demand of long term assets. As a result, the term premium increases substantially with habit formation. Next we calibrate our model economy and examine the quantitative predictions of our theoretical measures of equity premium, risk premium and term premium. In line with previous literature, we show that it is possible to find a reasonable calibration for which the equity premium is that observed in the data. However, we find that around 70 percent of the equity premium is just term premium. That is, a very large fraction of the increase in the equity premium is due to the asymmetric effect that habit formation has on the precautionary demand of an asset depending on its maturity. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we065522&r=dge |
| By: | Argia M. Sbordone |
| Abstract: | This paper analyzes the dynamics of prices and wages using a limited information approach to estimation. I estimate a two-equation model for the determination of prices and wages derived from an optimization-based dynamic model in which both goods and labor markets are monopolistically competitive; prices and wages can be reoptimized only at random intervals; and, when prices and wages are not reoptimized, they can be partially adjusted to previous-period aggregate inflation. The estimation procedure is a two-step minimum distance estimation that exploits the restrictions imposed by the model on a time-series representation of the data. In the first step, I estimate an unrestricted autoregressive representation of the variables of interest. In the second, I express the model solution as a constrained autoregressive representation of the data and define the distance between unconstrained and constrained representations as a function of the structural parameters that characterize the joint dynamics of inflation and labor share. This function summarizes the cross-equation restrictions between the model and the time-series representations of the data. I then estimate the parameters of interest by minimizing a quadratic function of that distance. I find that the estimated dynamics of prices and wages track actual dynamics quite well and that the estimated parameters are consistent with the observed length of nominal contracts. |
| Keywords: | Prices ; Wages ; Estimation theory ; Inflation (Finance) |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:256&r=dge |
| By: | Fabio Maccheroni; Massimo Marinacci; Aldo Rustichini |
| Abstract: | We introduce and axiomatize dynamic variational preferences, the dynamic version of the variational preferences we axiomatized in [21], which generalize the multiple priors preferences of Gilboa and Schmeidler [9], and include the Multiplier Preferences inspired by robust control and first used in macroeconomics by Hansen and Sargent (see [11]), as well as the classic Mean Variance Preferences of Markovitz and Tobin. We provide a condition that makes dynamic variational preferences time consistent, and their representation recursive. This gives them the analytical tractability needed in macroeconomic and financial applications. A corollary of our results is that Multiplier Preferences are time consistent, but Mean Variance Preferences are not. |
| Keywords: | Ambiguity Aversion; Model Uncertainty; Recursive Utility; Robust Control; Time Consistency |
| JEL: | C61 D81 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:1&r=dge |
| By: | Efrem Castelnuovo (University of Padua) |
| Abstract: | This paper employs a calibrated new-Keynesian DSGE model to assess the relative importance of two different, potentially important drivers of the Great Moderation in the U.S., namely 'good policy' vs. 'good luck'. The calibrated model is capable to replicate the actual standard deviations of inflation and output. Factual and counterfactual simulations are run in order to gauge the relative importance of the systematic monetary policy vs. the stochastic shocks hitting the economic system in shaping some macroeconomic volatilities. Importantly, under the bad policy scenario sunspots may influence the equilibrium values of the macroeconomic variables of interest, and distortions in the transmission mechanism going from the structural shocks to the variables of interest are allowed for. Our findings support the relevance of both drivers in causing inflation volatility. By contrast, output volatility can hardly be explained by a monetary policy switch like the one occurred in the U.S. at the end of the '70s. |
| JEL: | E30 E52 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0025&r=dge |
| By: | Pietro Garibaldi (University of Turin, Collegio Carlo Alberto, IGIER, CEPR and IZA Bonn) |
| Abstract: | This paper proposes a matching model that distinguishes between job creation by existing firms and job creation by firm entrants. The paper argues that vacancy posting and job destruction on the extensive margin, i.e. from firms that enter and exit the labour market, represents a viable mechanism for understanding the cyclical properties of vacancies and unemployment. The model features both hiring freeze and bankruptcies, where the former represents a sudden shut down of vacancy posting at the firm level with labour downsizing governed by natural turnover. A bankrupt firm, conversely, shut down its vacancies and lay offs its stock of workers. Recent research in macroeconomics has shown that a calibration of the Mortensen and Pissarides matching model account for 10 percent of the cyclical variability of the vacancy unemployment ratio displayed by U.S. data. A calibration of the model that explicitly considers hiring freeze and bankruptcy can account for 20 to 35 percent of the variability displayed by the data. |
| Keywords: | unemployment dynamics, matching models |
| JEL: | J30 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2263&r=dge |
| By: | Daniela Del Boca; Robert M. Sauer |
| Abstract: | In this paper, we formulate a dynamic utility maximization model of female labor force participation and fertility choices and estimate approximate decision rules using data on married women in Italy, Spain and France. The pattern of estimated state dependence effects across countries is consistent with aggregate patterns in part-time employment and child care availability, suggesting that labor market rigidities and lack of child care options are important sources of state dependence. Simulations of the model reveal that Italian and Spanish women would substantially increase their partic- ipation rates were they to face the French institutional environment. |
| Keywords: | Female Employment, Fertility, Child Care, Institutions, Decision Rules |
| JEL: | J2 C3 D1 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:20&r=dge |
| By: | Mark Gertler; Antonella Trigari |
| Abstract: | A number of authors have recently emphasized that the conventional model of unemployment dynamics due to Mortensen and Pissarides has difficulty accounting for the relatively volatile behavior of labor market activity over the business cycle. We address this issue by modifying the MP framework to allow for staggered multiperiod wage contracting. What emerges is a tractable relation for wage dynamics that is a natural generalization of the period-by-period Nash bargaining outcome in the conventional formulation. An interesting side-product is the emergence of spillover effects of average wages on the bargaining process. We then show that a reasonable calibration of the model can account well for the cyclical behavior of wages and labor market activity observed in the data. The spillover effects turn out to be important in this respect. |
| JEL: | E24 E32 J23 J3 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12498&r=dge |
| By: | Jérôme Adda (University College London and IFS); Christian Dustmann (University College London, IFS and IZA Bonn); Costas Meghir (University College London, IFS and IZA Bonn); Jean-Marc Robin (University of Paris 1, University College London, IFS and IZA Bonn) |
| Abstract: | We develop a dynamic discrete choice model of training choice, employment and wage growth, allowing for job mobility, in a world where wages depend on firm-worker matches, as well as experience and tenure and jobs take time to locate. We estimate this model on a large administrative panel data set which traces labour market transitions, mobility across firms and wages from the end of statutory schooling. We use the model to evaluate the lifecycle return to apprenticeship training and find that on average the costs outweigh the benefits; however for those who choose to train the returns are positive. We then use our model to consider the long-term lifecycle effects of two reforms: One is the introduction of an Earned Income Tax Credit in Germany, and the other is a reform to Unemployment Insurance. In both reforms we find very significant impacts of the policy on training choices and on the value of realised matches, demonstrating the importance of considering such longer term implications. |
| Keywords: | educational decision, apprenticeship, dynamic choice, evaluation |
| JEL: | I2 J6 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2260&r=dge |
| By: | Zeno Enders |
| Abstract: | A model of limited participation in the asset market is developed, in which varieties of consumption bundles are purchased sequentially. By this, heterogeneity in money holdings and in the effective elasticity of substitution of consumers arises, which affects optimal markups chosen by oligopolistic firms. The model generates a short-term inflation-output trade off, although all firms can set their optimal price each period and no informational problems exist. The responses are persistent even after a one-time monetary shock due to an internal propagation mechanism that stems from the slow dissemination of newly injected money. Furthermore, a liquidity effect, countercyclical markups, procyclical profits and marginal costs after monetary shocks are obtained. The model is simple and tractable, such that analytical results for the linearized model can be derived. |
| Keywords: | Limited Participation, Countercyclical Markups, Liquidity Effect Phillips Curve, Oligopolistic Competition |
| JEL: | E31 E32 E51 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2006/25&r=dge |