nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒11‒18
eleven papers chosen by
Christian Zimmermann
University of Connecticut

  1. Stability and Dynamics in an Overlapping Generations Economy under Flexible Wage Negotiation and Capital Accumulation By Erkki Koskela; Mikko Puhakka
  2. Linear-Quadratic Approximation of Optimal Policy Problems By Pierpaolo Benigno; Michael Woodford
  3. Labour Contracts, Equal Treatment and Wage-Unemployment Dynamics By Andy Snell; Jonathan Thomas
  4. Unequal Opportunities and Human Capital Formation By Daniel Mejía; Marc St-Pierre
  5. The Structural Transformation and Aggregate Productivity in Portugal By Margarida Duarte; Diego Restuccia
  6. Directed Search for Equilibrium Wage-Tenure Contracts By Shouyong Shi
  7. Two Flaws In Business Cycle Accounting By Lawrence J. Christiano; Joshua M. Davis
  8. Bankruptcy and Collateral in Debt Constrained Markets By Timothy J. Kehoe; David K. Levine
  9. Is Discrete Time a Good Representation of Continuous Time? By Omar Licandro; Luis A. Puch
  10. Business Cycles of Non-mono-cultural Developing Economies: The Case of ASEAN Countries By Kodama, Masahiro
  11. Inflation as a Redistribution Shock: Effects on Aggregates and Welfare By Matthias Doepke

  1. By: Erkki Koskela; Mikko Puhakka
    Abstract: We analyze the stability and dynamics of an overlapping generations model under imperfectly competitive labour markets without population growth and with perfect foresight. Under right-to-manage wage bargaining we assume that wage is negotiated after the decision on the capital stock. With Cobb-Douglas utility and production functions the steady state is unique and the steady state capital stock depends on the trade union’s bargaining power. This is because higher bargaining power of the trade union will induce workers to save more thus boosting the capital stock, ceteris paribus. Finally, we show that the steady state equilibrium is a saddle point.
    Keywords: overlapping generations economy, capital accumulation, flexible wage negotiation, stability and dynamics
    JEL: C62 J51
    Date: 2006
  2. By: Pierpaolo Benigno; Michael Woodford
    Abstract: We consider a general class of nonlinear optimal policy problems involving forward-looking constraints (such as the Euler equations that are typically present as structural equations in DSGE models), and show that it is possible, under regularity conditions that are straightforward to check, to derive a problem with linear constraints and a quadratic objective that approximates the exact problem. The LQ approximate problem is computationally simple to solve, even in the case of moderately large state spaces and flexibly parameterized disturbance processes, and its solution represents a local linear approximation to the optimal policy for the exact model in the case that stochastic disturbances are small enough. We derive the second-order conditions that must be satisfied in order for the LQ problem to have a solution, and show that these are stronger, in general, than those required for LQ problems without forward-looking constraints. We also show how the same linear approximations to the model structural equations and quadratic approximation to the exact welfare measure can be used to correctly rank alternative simple policy rules, again in the case of small enough shocks.
    JEL: C61 C63
    Date: 2006–11
  3. By: Andy Snell; Jonathan Thomas
    Abstract: This paper analyses a model in which firms cannot pay discriminate based on year of entry to a firm, and develops an equilibrium model of wage dynamics and unemployment. The model is developed under the assumption of worker mobility, so that workers can costlessly quit jobs at any time. Firms on the other hand are committed to contracts. Thus the model is related to Beaudry and DiNardo (1991). We solve for the dynamics of wages and unemployment, and show that real wages do not necessarily clear the labour market. Using sectoral productivity data from the post-war US economy, we assess the ability of the model to match actual unemployment and wage series. We also show that equal treatment follows in our model from the assumption of at-will employment contracting.
    Keywords: labour contracts, business cycle, unemployment, equal treatment, cohort effects
    JEL: E32 J41
    Date: 2006
  4. By: Daniel Mejía; Marc St-Pierre
    Abstract: This paper develops a tractable, heterogeneous agents general equilibrium model where individuals have different endowments of the factors that complement the schooling process. The paper explores the relationship between inequality of opportunities, inequality of outcomes, and aggregate efficiency in human capital formation. Using numerical solutions we study how the endogenous variables of the model respond to two different interventions in the distribution of opportunities: a meanpreserving spread and a change in the support. The results suggest that a higher degree of inequality of opportunities is associated with lower average level of human capital, a lower fraction of individuals investing in human capital, higher inequality in the distribution of human capital, and higher wage inequality. In particular, the model does not predict a trade-off between aggregate efficiency in human capital formation (as measured by the average level of human capital in the economy) and equality of opportunity.
    Keywords: Human Capital, Inequality, Equity-Efficiency Trade-off. Classification JEL: J24; J31; O15; D33.
  5. By: Margarida Duarte; Diego Restuccia
    Abstract: We document the substantial process of structural transformation -the reallocation of labor between agriculture, manufacturing, and services- and aggregate productivity growth undergone by Portugal between 1956 and 1995. In this paper, we assess the quantitative role of sectoral productivity in accounting for these processes. We calibrate a model of the structural transformation to data for the United States and use the model to gain insight into the factors driving the structural transformation and aggregate productivity growth in Portugal. The model implies that Portugal features low and roughly constant relative productivity in agriculture and services (around 22 percent) and a modest but growing relative productivity in manufacturing (from 44 to 110 percent). We find that productivity growth in manufacturing accounts for most of the reduction of the aggregate productivity gap with the United States and that further substantial improvements in relative aggregate productivity can only be accomplished via improvements in the relative productivity of the service sector.
    Keywords: productivity, structural transformation, relative sectoral productivity.
    JEL: O1 O4
    Date: 2006–11–13
  6. By: Shouyong Shi
    Abstract: I analyze the equilibrium in a labor market where firms offer wage-tenure contracts to direct the search of employed and unemployed workers. Each applicant observes all offers and there is no coordination among individuals. Workers' applications (as well as firms' recruiting decisions) are optimal. This optimality requires the equilibrium to be formulated differently from the that in the literature of undirected search. I provide such a formulation and show that the equilibrium exists. In the equilibrium, individuals explicitly tradeoff between an offer and the matching rate at that offer. This tradeoff yields a unique offer which is optimal for each worker to apply, and applicants are separated endogenously according to their current values. Despite such uniqueness and separation, there is a non-degenerate and continuous wage distribution of employed workers in the stationary equilibrium. The density of this distribution is increasing at low wages and decreasing at high wages. In all equilibrium contracts, wages increase with tenure, which results in quit rates to decrease with tenure. Moreover, the model makes novel predictions about individuals' job-to-job transition and comparative statics.
    Keywords: Directed search; on the job; wage tenure contracts
    JEL: D83 E24 J60
    Date: 2006–11–03
  7. By: Lawrence J. Christiano; Joshua M. Davis
    Abstract: Using 'business cycle accounting' (BCA), Chari, Kehoe and McGrattan (2006) (CKM) conclude that models of financial frictions which create a wedge in the intertemporal Euler equation are not promising avenues for modeling business cycle dynamics. There are two reasons that this conclusion is not warranted. First, small changes in the implementation of BCA overturn CKM's conclusions. Second, one way that shocks to the intertemporal wedge impact on the economy is by their spillover effects onto other wedges. This potentially important mechanism for the transmission of intertemporal wedge shocks is not identified under BCA. CKM potentially understate the importance of these shocks by adopting the extreme position that spillover effects are zero.
    JEL: C32 C52
    Date: 2006–10
  8. By: Timothy J. Kehoe; David K. Levine
    Abstract: Typical models of bankruptcy and collateral rely on incomplete asset markets. In fact, bankruptcy and collateral add contingencies to asset markets. In some models, these contingencies can be used by consumers to achieve the same equilibrium allocations as in models with complete markets. In particular, the equilibrium allocation in the debt constrained model of Kehoe and Levine (2001) can be implemented in a model with bankruptcy and collateral. The equilibrium allocation is constrained efficient. Bankruptcy occurs when consumers receive low income shocks. The implementation of the debt constrained allocation in a model with bankruptcy and collateral is fragile in the sense of Leijonhufvud's "corridor of stability," however: If the environment changes, the equilibrium allocation is no longer constrained efficient.
    JEL: D50 D52 D61 G13
    Date: 2006–10
  9. By: Omar Licandro; Luis A. Puch
    Abstract: Economists model time as continuous or discrete. The recent literature on continuous time models with delays should help to bridge the gap between these two families of models. In this note, we propose a simple time–to–build model in continuous time, and show that a discrete time version is a true representation of the continuous time problem under some sufficient conditions.
    Keywords: Discrete Time, Continuous Time, Time–to–Build, Delay, DDEs
    JEL: O40 E32 C61
    Date: 2006
  10. By: Kodama, Masahiro
    Abstract: Based on analyses of actual data, we reveal that many Asian developing economies own economic structural features of “non-mono-cultural economy†and the “large primary good sectorâ€, which have not been discussed in developing economies RBC literature. We also examine the input-output tables to develop a model reflecting actual developing economies' structures. Referring to the analyses, we construct RBC models of ASEAN countries. Based on the model, we find that approximately half of GDP volatility is attributable to domestic productivity shocks, and the remaining half is attributable to price shocks.
    Keywords: Business Cycles, Developing Economies, Economic development, Input-output tables, Asia, Southeast Asia, Thailand, Malaysia, Indonesia, Philippines
    JEL: D58 E32 F41 O53
    Date: 2006–03
  11. By: Matthias Doepke

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