New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒11‒12
ten papers chosen by



  1. On stabilisation policy: Are there conflicting implications for growth and welfare? By Dimitrios Varvarigos
  2. Labor-Market Search, Financial Market Integration, and Macroeconomic Dynamics By Cenesiz, Alper; Pierdzioch, Christian
  3. Equilibrium price dynamics in an overlapping-generations exchange economy By Brito, Paulo; Dilao, Rui
  4. Capital Mobility, Labor Markets, and Macroeconomic Policies By Cenesiz, Alper; Pierdzioch, Christian
  5. A New Cost Channel of Monetary Policy By Cenesiz, Alper
  6. Capital Mobility and Labor Market Volatility By Cenesiz, Alper; Pierdzioch, Christian
  7. Efficiency Wages, Financial Market Integration, and Macroeconomic Dynamics By Cenesiz, Alper; Pierdzioch, Christian
  8. Staying on the Dole By Holger Strulik; Jean-Robert Tyran; Paolo Vanini
  9. Bayesian Learning in Optimal Stochastic Growth By Koulovatianos, Christos; Mirman, Leonard J.; Santugini, Marc
  10. On Linear Quadratic Approximations By Debortoli, Davide; Nunes, Ricardo

  1. By: Dimitrios Varvarigos (Dept of Economics, Loughborough University)
    Abstract: The paper examines the choices for fiscal stabilisation policy that maximise aggregate welfare and long-run growth. This is done in the context of a stochastic dynamic general equilibrium model where premeditated learning provides the engine of human capital accumulation and growth, and technology shocks provide the impulse source of fluctuations. Contrary to existing conventional wisdom, the results indicate a conflict between the two policy objectives: the choice of no stabilisation, associated with maximum growth, is also associated with minimum welfare. Welfare maximisation requires a full stabilisation response to the occurrence of business cycles.
    Keywords: money; growth; volatility.
    JEL: E32 E63 O41
    Date: 2006–07
    URL: http://d.repec.org/n?u=RePEc:lbo:lbowps:2006_19&r=dge
  2. By: Cenesiz, Alper; Pierdzioch, Christian
    Abstract: We used a dynamic two-country optimizing model to analyze the implications of financial market integration for macroeconomic dynamics. The model features a labor-market friction in the form of labor-market search. We used the model to analyze how labor-market search affects how financial market integration changes macroeconomic dynamics in the aftermath of a monetary policy shock, a government spending shock, and a productivity shock. We found that labor-market search has nontrivial, and quantitatively large implications for the way financial market integration affects macroeconomic dynamics.
    Keywords: Open economy macroeconomics; Financial market integration; Labor-market search; Macroeconomic dynamics
    JEL: E42 E44 F36 F41
    Date: 2006–03
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:633&r=dge
  3. By: Brito, Paulo; Dilao, Rui
    Abstract: We present a continuous time overlapping generations model for an endowment Arrow-Debreu economy with an age-structured population. For an economy with a balanced growth path, we prove that Arrow-Debreu equilibrium prices exist, and their dynamic properties are age-dependent. Our model allows for an explicit dependence of prices on critical age-specific endowment parameters. We show that, if endowments are distributed earlier than some critical age, then speculative bubbles for prices do exist.
    Keywords: Arrow-Debreu equilibrium; overlapping generations models; McKendrick model.
    JEL: G12 D51 J10
    Date: 2006–10–31
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:699&r=dge
  4. By: Cenesiz, Alper; Pierdzioch, Christian
    Abstract: We used a dynamic two-country optimizing model featuring a labor-market friction to analyze the implications of international capital mobility for the effectiveness of macroeconomic policies in an open economy. Conventional wisdom suggests that higher capital mobility significantly increases (decreases) the effectiveness of monetary (fiscal) policy. Simulations of the model suggest that accounting for a labor-market friction substantially reduces the quantitative impact of capital mobility on the effectiveness of monetary and fiscal policy.
    Keywords: Open economy macroeconomics; Financial markets; Labor-market friction
    JEL: F41
    Date: 2006–01
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:532&r=dge
  5. By: Cenesiz, Alper
    Abstract: I develop a new cost channel of monetary policy transmission in a small scale, dynamic, general equilibrium model. The new cost channel of monetary policy transmission implies that the frequency of price adjustment increases in the nominal interest rate. I report that allowing for the new cost channel can account both for the muted and delayed inflation response and for the persistence of the output response to monetary policy shocks. Without any additional assumption, my model can also generate the delayed output response.
    Keywords: Price stickiness; Monetary policy; Price adjustment; Persistence.
    JEL: E52 E32 E31
    Date: 2006–07
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:503&r=dge
  6. By: Cenesiz, Alper; Pierdzioch, Christian
    Abstract: We used a dynamic two-country optimizing model featuring efficiency wages to analyze the implications of capital mobility for labor market volatility. Capital mobility magnifies the short-run effects of productivity shocks and monetary shocks on employment and the real wage, but dampens the medium-run effects. The overall effects of capital mobility on the volatility of employment and the real wage, their cyclical properties, and the persistence of employment fluctuations are moderate.
    Keywords: Capital mobility; Efficiency wages; Labor market volatility
    JEL: F36 E44 F41
    Date: 2006–08
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:504&r=dge
  7. By: Cenesiz, Alper; Pierdzioch, Christian
    Abstract: We used a dynamic two-country optimizing model featuring a labor-market friction in the form of efficiency wages to analyze the implications of financial market integration for macroeconomic dynamics. Efficiency wages tend to magnify the effect of financial market integration on macroeconomic dynamics. As compared to a model featuring a Walrasian labor market, efficiency wages may even reverse the direction of the change in macroeconomic dynamics caused by financial market integration.
    Keywords: Open economy macroeconomics; Financial market integration; Efficiency wages
    JEL: F36 E44 F41
    Date: 2006–05
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:506&r=dge
  8. By: Holger Strulik (University of Hannover); Jean-Robert Tyran (Department of Economics, University of Copenhagen); Paolo Vanini (University of Zurich)
    Abstract: We develop a simple model of short- and long-term unemployment to study how labor market institutions interact with labor market conditions and personal characteristics of the unemployed. We analyze how the decision to exit unemployment and to mitigate human capital degradation by retraining depends on education, skill degradation, age, labor market tightness, taxes, unemployment insurance benefits and welfare assistance. We extend our analysis by allowing for time-inconsistent choices and demonstrate the possibility of an unemployment trap.
    Keywords: unemployment; skill degradation; retraining; unemployment benefits; welfare assistance; present-biased preferences
    JEL: J64 J31 J38
    Date: 2006–10
    URL: http://d.repec.org/n?u=RePEc:kud:kuiedp:0618&r=dge
  9. By: Koulovatianos, Christos; Mirman, Leonard J.; Santugini, Marc
    Abstract: We introduce Bayesian learning in a general stochastic growth model and examine the consumption and saving decisions of an agent facing a stochastic production function depending on a parameter. The agent does not know the value of the parameter but has beliefs about it, expressed as a prior distribution. By collecting observations of the stock of capital, given his consumption decision, his beliefs about the value of the parameter evolve over time using Bayesian methods. Both active and passive Bayesian learning can be studied here. The active Bayesian learner can affect the learning process through his present decision, while the passive Bayesian learner cannot. We study the effect of changes in the distributions of the production shock and of the unknown parameter on consumption and saving, using the concepts of first-order and second-order stochastic dominance, in a class of growth models with passive Bayesian learning. These results are general in that they apply to general distribution functions. In particular, our results are valid for priors that are not conjugate. For example, we show that a riskier distribution of the production shock has no effect on consumption, while a riskier prior distribution of the value of the unknown parameter affects consumption.
    JEL: D80 D90
    Date: 2006–11–09
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:764&r=dge
  10. By: Debortoli, Davide; Nunes, Ricardo
    Abstract: We prove the generality of the methodology proposed in Benigno and Woodford (2006). We show that, even in the presence of a distorted steady state, it is always possible and relatively simple to obtain a purely quadratic approximation to the welfare measure. We also show that, in order to do so, the timeless perspective assumption is crucial.
    Keywords: Linear-Quadratic Approximation; Distorted Steady State; Timeless Perspective
    JEL: C60 E0
    Date: 2006–07
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:544&r=dge

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