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on Dynamic General Equilibrium |
| By: | Bovenberg,Lans; Uhlig,Harald (Tilburg University, Center for Economic Research) |
| Abstract: | This paper explores the optimal risk sharing arrangement between generations in an overlapping generations model with endogenous growth. We allow for nonseparable preferences, paying particular attention to the risk aversion of the old as well as overall "life-cycle" risk aversion. We provide a fairly tractable model, which can serve as a starting point to explore these issues in models with a larger number of periods of life, and show how it can be solved. We provide a general risk sharing condition, and discuss its implications. We explore the properties of the model quantitatively. Among the key findings are the following. First and for reasonable parameters, the old typically bear a larger burden of the risk in productivity surprises, if old-age risk-aversion is smaller than life risk aversion, and vice versa. Thus, it is not necessarily the case that the young ensure smooth consumption of the old. Second, consumption of the young and the old always move in the same direction, even for population growth shocks. This result is in contrast to the result of a fully-funded decentralized system without risk-sharing between generations. Third, persistent increases in longevity will lead to lower total consumption of the old (and thus certainly lower per-period consumption of the old) as well as the young as well as higher work effort of the young. The additional resources are instead used to increase growth and future output, resulting in higher consumption of future generations. |
| Keywords: | social optimum;pensions systems;risk sharing;overlapping |
| JEL: | E21 E61 E62 O40 H21 H55 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2006101&r=dge |
| By: | N. Gregory Mankiw; Ricardo Reis |
| Abstract: | This paper develops and analyzes a general-equilibrium model with sticky information. The only rigidity in goods, labor, and financial markets is that agents are inattentive, sporadically updating their information sets, when setting prices, wages, and consumption. After presenting the ingredients of such a model, the paper develops an algorithm to solve this class of models and uses it to study the model’s dynamic properties. It then estimates the parameters of the model using U.S. data on five key macroeconomic time series. It finds that information stickiness is present in all markets, and is especially pronounced for consumers and workers. Variance decompositions show that monetary policy and aggregate demand shocks account for most of the variance of inflation, output, and hours. |
| JEL: | E10 E30 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12605&r=dge |
| By: | Jaimovich, Nir; Rebelo, Sérgio |
| Abstract: | We propose a model that generates an economic expansion in response to good news about future total factor productivity (TFP) or investment-specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and preferences that exhibit a weak short-run wealth effect on the labour supply. These preferences nest the two classes of utility functions most widely used in the business cycle literature as special cases. Our model can generate recessions that resemble those of the post-war U.S. economy without relying on negative productivity shocks. The recessions are caused not by contemporaneous negative shocks but rather by lackluster news about future TFP or investment-specific technical change. |
| Keywords: | business cycles; expectations; news |
| JEL: | E3 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5877&r=dge |
| By: | Carlos de Resende |
| Abstract: | Consumption volatility relative to output volatility is consistently higher in emerging economies than in developed economies. One natural explanation is that emerging economies are more likely to face borrowing constraints and, as a consequence, find it more difficult to use international capital markets to smooth consumption. The author investigates how much this mechanism alone can account for the relative consumption volatility differential between emerging and developed economies. His theoretical approach relies on a standard dynamic general-equilibrium model of a small open endowment economy that is subject to an endogenous borrowing constraint. The borrowing constraint makes the small economy exactly indifferent between two options: (i) repaying its external debt, or (ii) defaulting and having to live in financial autarky in the future. The model for the constrained economy is calibrated to match Brazilian data during the period 1980-2001. The author's findings suggest that the model is capable of accounting for more than half of the observed relative consumption volatility differential. |
| Keywords: | International topics |
| JEL: | F32 F34 F41 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-37&r=dge |
| By: | Javier Garcia-Cicco; Roberto Pancrazi; Martin Uribe |
| Abstract: | This paper investigates the hypothesis that an RBC model driven by permanent and transitory productivity shocks accounts well for business cycles in emerging markets. Existing studies that make this claim use short time series to estimate the parameters of the underlying driving forces. This practice is problematic, particularly because a central goal in this literature is to ascertain the role of permanent shocks to productivity. One contribution of the present study is to use a data set consisting of almost a century of aggregate data from Argentina. We conduct a GMM estimation of the parameters of a small open economy RBC model. We find that the RBC model does a poor job at explaining the Argentine business cycle. The difficulties of the model are most evident along five dimensions: (a) the RBC model counterfactually predicts that consumption growth is less volatile than output growth. (b) The volatility of the trade balance-to-output ratio implied by the RBC model is four times as large as its empirical counterpart. (c) The volatility of investment growth is half as large in the model as it is in the data. (d) The RBC model predicts the wrong sign for the autocorrelation function of output growth. (e) A robust prediction of the model is that the trade-balance share in output is a near random walk, with an autocorrelation function close to unity, whereas in the data, the highest autocorrelation coefficient of this variable takes place at the first order and is less than 0.6, with higher-order autocorrelations converging quickly to zero. |
| JEL: | F41 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12629&r=dge |
| By: | Jaimovich, Nir; Rebelo, Sérgio |
| Abstract: | We explore the business cycle implications of expectation shocks and of two well-known psychological biases, optimism and overconfidence. The expectations of optimistic agents are biased toward good outcomes, while overconfident agents overestimate the precision of the signals that they receive. Both expectation shocks and overconfidence can increase business-cycle volatility, while preserving the model's properties in terms of comovement, and relative volatilities. In contrast, optimism is not a useful source of volatility in our model. |
| Keywords: | business cycles; expectations; optimism; overconfidence |
| JEL: | E3 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5909&r=dge |
| By: | Dirk Krueger; Hanno Lustig |
| Abstract: | In models with a large number of agents who have constant relative risk aversion (CRRA) preferences, the absence of insurance markets for idiosyncratic labor income risk has no effect on the premium for aggregate risk if the distribution of idiosyncratic risk is independent of aggregate shocks. In spite of the missing markets, a representative agent who consumes aggregate income prices the excess returns on stocks correctly. This result holds regardless of the persistence of idiosyncratic shocks, as long as they are not permanent, even when households face binding, and potentially very tight borrowing constraints. Consequently, in this class of models there is no link between the extent of self-insurance against idiosyncratic income risk and aggregate risk premia. |
| JEL: | E21 E44 G0 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12634&r=dge |
| By: | Frédéric, DOCQUIER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Oliver, Paddison; Pierre PESTIEAU (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)) |
| Abstract: | This paper considers a three-overlapping-generations model of endogeneous growth wherein human capital is the engine of growth. It first contrasts the ‘laissez-faire’ and the optimal solutions. Three possible accumulation regimes are distinguished. Then it discusses a standard set of tax-transfer instruments that allow for decentralization of the social optimum. Within the limits of our model, the rationale for the standard pattern of intergenerational transfers (the working-aged financing the education of the young and the pension of the old) is seriously questioned. On pure efficiency grounds, the case for generous public pensions is rather weak. |
| Keywords: | Endogenous growth, human capital, intergenerational transfers |
| JEL: | D90 H21 H52 |
| Date: | 2006–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2006022&r=dge |
| By: | Raouf, BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Blanca, MARTINEZ; Cagri, SAGLAM |
| Abstract: | We study an optimal growth model with one-hoss-shay vintage capital, where labor resources can be allocated freely either to production, technology adoption or capital maintenance. Technological progress is partly embodied. Adoption labor increases the level of embodied technical progress. First, we are able to disentangle the amplification-propagation role of maintenance in business fluctuations : in the short run, the response of the model to transitory shocks on total factor productivity in the final good sector are definitely much sharper compared to the counterpart model without maintenance but with the same average depreciation rate. Moreover, the one-hoss shay technology is shown to reinforce this amplification-propagation mechanism. We also find that accelerations in embodied technical progress should be responded by a gradual adoption effort, and capital maintenance should be the preferred instrument in the short run. |
| Keywords: | Technology adoption, Maintenance, Vintage capital, Dynamics |
| JEL: | E22 E32 O40 |
| Date: | 2006–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2006030&r=dge |
| By: | Christian Hellwig; Guido Lorenzoni |
| Abstract: | We characterize equilibria with endogenous debt constraints for a general equilibrium economy with limited commitment in which the only consequence of default is losing the ability to borrow in future periods. First, we show that equilibrium debt limits must satisfy a simple condition that allows agents to exactly roll over existing debt period by period. Second, we provide an equivalence result, whereby the resulting set of equilibrium allocations with self-enforcing private debt is equivalent to the allocations that are sustained with unbacked public debt or rational bubbles; for the latter, there exist well known existence and characterization results. In contrast to the classic result by Bulow and Rogoff (AER 1989), positive levels of debt are sustainable in our environment because the interest rate is sufficiently low to provide repayment incentives. |
| JEL: | D50 D52 E40 F34 G10 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12614&r=dge |
| By: | Monika Piazzesi; Martin Schneider |
| Abstract: | This paper considers how the role of inflation as a leading business-cycle indicator affects the pricing of nominal bonds. We examine a representative agent asset pricing model with recursive utility preferences and exogenous consumption growth and inflation. We solve for yields under various assumptions on the evolution of investor beliefs. If inflation is bad news for consumption growth, the nominal yield curve slopes up. Moreover, the level of nominal interest rates and term spreads are high in times when inflation news are harder to interpret. This is relevant for periods such as the early 1980s, when the joint dynamics of inflation and growth was not well understood. |
| JEL: | E0 E3 E4 G0 G12 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12609&r=dge |
| By: | Eduardo S. Schwartz; Claudio Tebaldi |
| Abstract: | The presence of illiquid assets, such as human wealth, housing and a proprietorship substantially complicates the problem of portfolio choice. This paper is concerned with the problem of optimal asset allocation and consumption in a continuous time model when one asset cannot be traded. This illiquid asset, which depends on an uninsurable source of risk, provides a liquid dividend. In the case of human capital we can think about this dividend as labor income. The agent is endowed with a given amount of the illiquid asset and with some liquid wealth which can be allocated in a market where there is a risky and a riskless asset. The main point of the paper is that the optimal allocations to the two liquid assets and consumption will critically depend on the endowment and characteristics of the illiquid asset, in addition to the preferences and to the liquid holdings held by the agent. We provide what we believe to be the first analytical solution to this problem when the agent has power utility of consumption and terminal wealth. We also derive the value that the agent assigns to the illiquid asset. The risk adjusted valuation procedure we develop can be used to value both liquid and illiquid assets, as well as contingent claims on those assets. |
| JEL: | G11 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12633&r=dge |
| By: | John Fender; Neil Rankin |
| Abstract: | A dynamic general equilibrium model of an open economy with staggered wages is constructed. We analyse disinflation through pegging the exchange rate. In accordance with the stylised facts, an initial boom in output can result, depending on the exact level of the peg. The reason is an element of preannouncement in the policy. Disinflation through reducing monetary growth is shown to be equivalent to disinflation through pegging the exchange rate, if the latter includes an initial currency revaluation. This helps explain why such disinflation causes a short-run slump. The model can also help explain inflation persistence. |
| Keywords: | Exchange-rate-based disinflation, money-based disinflation, staggered wages, preannouncement effects. |
| JEL: | F52 E41 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0610&r=dge |
| By: | Robert Shimer; Ivan Werning |
| Abstract: | This paper argues that a risk-averse worker's after-tax reservation wage encodes all the relevant information about her welfare. This insight leads to a novel test for the optimality of unemployment insurance based on the responsiveness of reservation wages to unemployment benefits. Some existing estimates imply significant gains to raising the current level of unemployment benefits in the United States, but highlight the need for more research on the determinants of reservation wages. Our approach complements those based on Baily's (1978) test. |
| JEL: | J6 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12618&r=dge |