nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒10‒07
thirteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. The Transitional Dynamics of Fiscal Policy in Small Open Economies By Ben J. Heijdra; Jenny Ligthart
  2. Equilibrium dynamics in an aggregative model of capital accumulation with heterogeneous agents and elastic labor By Cuong Le Van; Manh-Hung Nguyen; Yiannis Vailakis
  3. The Macroeconomic Effects of Non-Zero Trend Inflation By Robert Amano; Steve Ambler; Nooman Rebei
  4. Money Demand in General Equilibrium Endogenous Growth: Estimating the Role of a Variable Interest Elasticity By Gillman, Max; Otto, Glen
  5. FLAT TAX REFORMS IN THE U.S.: A BOON FOR THE INCOME POOR By Javier Díaz-Giménez; Josep Pijoan-Mas
  6. Education, Growth, and Redistribution in the Presence of Capital Flight By Debajyoti Chakrabarty
  7. Financial Liberalization in a Small Open Economy By Jürgen von Hagen; Haiping Zhang
  8. No-arbitrage condition and existence of equilibrium with dividends By Cuong Le Van; Nguyen Ba Minh
  9. Parametric continuity of stationary distributions By Cuong Le Van; John Stachurski
  10. Spending Natural Resource Revenues in an Altruistic Growth Model By Elisabeth Hermann Frederiksen
  11. Growth, Longevity and Public Policy By Gregory Ponthiere
  12. On optimal growth models whent the discount factor is near 1 or equal to 1 By Cuong Le Van; Lisa Morhaim
  13. When Does a Developing Country Use New Technologies? By Cuong Le Van; Olivier Bruno; Bruno Masquin

  1. By: Ben J. Heijdra; Jenny Ligthart
    Abstract: The paper studies the dynamic macroeconomic effects of fiscal shocks of various duration (permanent and temporary) under different financing methods (lump-sum tax and government debt). To this end, we develop an intertemporal macroeconomic model for a small open economy, featuring monopolistic competition in the intermediate goods market, endogenous (intertemporal) labor supply, and finitely lived households. Endogenous labor supply is crucial in generating cyclical adjustment paths and yields faster convergence to the new steady state compared with exogenous labor supply. The quantitative output effects and transitional dynamics of fiscal policy differ substantially from those of an infinitely lived representative agent model. In addition, government debt is key in making the timing of shocks matter, thus yielding permanent output effects of temporary fiscal shocks.
    Keywords: fiscal policy, output multipliers, Blanchard-Yaari overlapping generations, monopolistic competition, small open economy
    JEL: E12 E63 L16
    Date: 2006
  2. By: Cuong Le Van (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Manh-Hung Nguyen (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Yiannis Vailakis (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: The paper extends the canonical representative agent Ramsey model to include heterogeneous agents and elastic labor supply. The welfare maximization problem is analyzed and shown to be equivalent to a non-stationary reduced form model. An iterative procedure is exploited to prove the supermodularity of the indirect utility function. Supermodularity is subsequently used to establish the convergence of optimal paths.
    Keywords: Single-sector growth model, heterogeneous agents, elastic labor supply, supermodularity
    Date: 2006–09–26
  3. By: Robert Amano; Steve Ambler; Nooman Rebei
    Abstract: The authors study the macroeconomic effects of non-zero trend inflation in a simple dynamic stochastic general-equilibrium model with sticky prices. They show that trend inflation leads to a substantial reduction in the stochastic means of output, consumption, and employment. It also leads to an increase in the variability and persistence of most aggregates. Price dispersion across firms unambiguously increases the welfare costs of inflation. The effects hold qualitatively no matter how sticky prices are modelled, but they are quantitatively much stronger under Calvo pricing.
    Keywords: Business fluctuations and cycles; Economic models; Inflation and prices; Inflation targets
    JEL: E24 E32
    Date: 2006
  4. By: Gillman, Max (Cardiff Business School); Otto, Glen
    Abstract: The paper presents and tests a theory of the demand for money that is derived from a general equilibrium, endogenous growth economy, which in effect combines a special case of the shopping time exchange economy with the cash-in-advance framework. The model predicts that both higher inflation and financial innovation - that reduces the cost of credit - induce agents to substitute away from money towards exchange credit. The implied interest elasticity of money demand rises with the inflation rate and financial innovation rather than being constant as is typical in shopping time specifications. Using quarterly data for the US and Australia, we find evidence of cointegration for the money demand model. This money demand stability results because of the extra series that capture financial innovation; included are robustness checks and comparison to a standard money demand specification.
    JEL: C23 E41 O42
    Date: 2006–09
  5. By: Javier Díaz-Giménez; Josep Pijoan-Mas (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: In this article we queantify the aggregate, distributional and welfare consequences of two revenue neutral flat-tax reforms using a model economy that replicates the U.S. distributions of earnings, income and wealth in very much detail. We find that the less progressive reform brings about a 2.4 percent increase in steady-state output and a more unequal distribution of after-tax income. In contrast, the more progressive reform brings about a -2.6 percent reduction is steady-state output and a distribution of aftertax income that is more egalitarian. We also find that in the less progressive flat-tax economy aggregate welfare falls by -0.17 percent of consumption, and in the more progessive flat-tax economy it increases by 0.45 percent of consumption. In both flat-tax refoms the income poor pay less income taxes and obtain sizeable welfare gains.
    Keywords: Flat-tax reforms, efficiency, inequality, earnings distribution, income distributions, wealth distribution.
    JEL: D31 E62 H23
    Date: 2006–07
  6. By: Debajyoti Chakrabarty
    Abstract: We construct an overlapping generations model to study the effect of capital controls on human capital investments and the incidence of redistributive politics in a growing economy. We argue that the conventional wisdom linking higher capital controls to lower growth is reproduced only when an economy is sufficiently developed. For under-developed countries, higher capital controls are beneficial for human capital accumulation suggesting that the wisdom does not apply. In an augmented version of the model, we show that a modern sector, characterized by positive levels of investment in education, may not exist unless capital controls are sufficiently high. In particular, higher capital controls make it feasible for a modern sector to exist by lowering the threshold income level required by workers to invest in human capital. These results are consistent with recent evidence suggesting that capital account liberalization positively affects growth only after a country has achieved a certain threshold level of absorptive capacities.
    Keywords: Capital Flight, Economic Growth, Human Capital, Income Distribution, Long Term Capital Movements, Optimal Taxation
    JEL: D33 E62 F21 O19 O40
    Date: 2006–09
  7. By: Jürgen von Hagen; Haiping Zhang
    Abstract: We analyze the long-run and short-run implications of financial liberalization in a small open economy. Our main results are as follows. First, whether financial deregulation in one sector can improve production efficiency may depend on financial regulation in other sectors. Second, financial liberalization may have opposite welfare implications to domestic agents with different productivity in the long run. Third, although some domestic agents lose in the long run, they benefit from financial liberalization during the transitional process of deregulation. Finally, a gradual implementation helps achieve a smooth transition.
    Keywords: financial frictions, financial liberalization, foreign borrowing, macroeconomic fluctuations, overshooting
    JEL: E32 E44 F34 F41
    Date: 2006
  8. By: Cuong Le Van (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Nguyen Ba Minh (Hanoi University of Commerce - [Hanoi University of Commerce])
    Abstract: In this paper we first give an elementary proof of existence of equilibrium with dividends in an economy with possibly satiated consumers.<br />We then introduce a no-arbitrage condition and show that it is equivalent to the existence of equilibrium with dividends.
    Keywords: equilibrium with dividends, economy with possibly satiated consumers, no-arbitrage condition
    Date: 2006–09–26
  9. By: Cuong Le Van (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); John Stachurski (Universite de Melbourne - [The University of Melbourne])
    Abstract: For Markovian economic models, long-run equilibria are typically identified with the stationary (invariant) distributions generated by the model. In this paper we<br />provide new sufficient conditions for continuity in the map from parameters to these equilibria. Several existing results are shown to be special cases of our theorem.
    Keywords: Markov processes, stochastic dynamics, parametric continuity
    Date: 2006–09–26
  10. By: Elisabeth Hermann Frederiksen (Department of Economics, University of Copenhagen)
    Abstract: This paper examines how revenues from a natural resource interact with growth and welfare in an overlapping generations model with altruism. The revenues are allocated between public productive services and direct transfers to members of society by spending policies. We analyze how these policies influence the dynamics, and how the dynamics are influenced by the abundance of the revenue. Abundant revenues may harm growth, but growth and welfare can be oppositely affected. We also provide the socially optimal policy. Overall, the analysis suggests that variation in the strength of altruism and in spending policies may be part of the reason why natural resources seem to affect economic performance across nations differently.
    Keywords: natural resources; economic growth; welfare; altruism
    JEL: D64 O41 Q33 Q38
    Date: 2006–09
  11. By: Gregory Ponthiere
    Abstract: This paper studies the optimal long-run public intervention in a two-period OLG model where the probability of surviving the first period and the length of the second period can be influenced by distinct policies. While the optimal size of public intervention depends on the extra-productivity of public spendings in longevity, its optimal structure is determined by (1) differences in the productivity of each policy; (2) how growth would influence each longevity aspect under laissez-faire; (3) the dependence of each longevity aspect on past achievements. Given competing effects, the optimal intervention can hardly, under additive expected lifetime utility, be strongly unbalanced.
    Keywords: growth, longevity, public policy, rectangularization
    JEL: E13 H51 I12 O41
    Date: 2006
  12. By: Cuong Le Van (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Lisa Morhaim (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: The aim of this paper is to fill the gap between intertemporal growth models when the discount factor beta is close to one and when it equals one.<br />We show that the value function and the policy function are continuous with respect both to the discount factor and the initial stock of capital<br />x0. We prove that the optimal policy g(x0) is differentiable and that Dg(x0) is continuous with respect to (beta, x0). As a by-product, a global<br />turnpike result is proved.
    Keywords: Optimal growth, discount factor, value function, policy function,differentiability, turnpike.
    Date: 2006–09–27
  13. By: Cuong Le Van (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Olivier Bruno (GREDEG - [Université de Nice Sophia-Antipolis]); Bruno Masquin (GREDEG - [Université de Nice Sophia-Antipolis])
    Abstract: We develop a model of optimal pattern of economic development that is first rooted in physical capital accumulation and then in technical progress. We study an economy where capital accumulation and<br />innovative activity take place within a two sector model. The first sector produces a consumption good using physical capital and non skilled labor. Technological progress in the consumption sector is driven by the research activity that takes place in the second sector. Research activity which produces new technologies requires technological capital<br />and skilled labor. New technologies induce an endogenous increase of the Total Factor Productivity of the consumption sector. Physical and technological capital are not substitutable while skilled and non skilled labor may be substitutable.<br />We show that under conditions on the adoption process of new technologies, the optimal strategy for a developing country consist in accumulating<br />physical capital first; postponing the importation of technological capital to the second stage of development. This result is due to<br />a threshold effect from which new technologies begin to have an impact on the productivity of the consumption sector. However, we show that<br />once a certain level of wealth is reached, it becomes optimal for the economy to import technological capital to produce new technologies.
    Keywords: capital accumulation, two sector model, technological progress, new technologies, Total Factor Productivity, skilled labor, non skilled labor
    Date: 2006–09–26

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