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on Dynamic General Equilibrium |
| By: | Claustre Bajona; Timothy J. Kehoe |
| Abstract: | This paper contrasts the properties of dynamic Heckscher-Ohlin models with overlapping generations with those of models with infinitely lived consumers. In both environments, if capital is mobile across countries, factor price equalization occurs after the initial period. In general, however, the properties of equilibria differ drastically across environments: With infinitely lived consumers, we find that factor prices equalize in any steady state or cycle and that, in general, there is positive trade in any steady state or cycle. With overlapping generations, in contrast, we construct examples with steady states and cycles in which factor prices are not equalized, and we find that any equilibrium that converges to a steady state or cycle with factor price equalization has no trade after a finite number of periods. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:377&r=dge |
| By: | Paulo Brito; Rui Dilao |
| 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: | D51 G12 J0 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp272006&r=dge |
| By: | M.S.Rafiq (Dept of Economics, Loughborough University, United Kingdom) |
| Abstract: | Following Kydland and Prescott's (1982) seminal paper, a key question that has been debated widely remains, `Are business cycles mainly the result of permanent shocks to productivity?' This paper attempts to answer this question in the context of the Euro area economy as a whole, given current efforts to understand the design of Euro-wide policies. To help shed light on the preceding question for the Euro area a common trends model is utilised, allowing for the study of growth and business cycles phenomena in a joint framework. This paper imposes a long-run restriction implied by a large class of Real Business Cycle (RBC) models - identifying permanent productivity shocks as innovations to a common stochastic trend in output, consumption and investment - to provide evidence on the role of balanced growth shocks for the Euro area business cycle. This approach is given further credibility by the finding of stationary great ratios, justifying the use of exogenous growth models in examining the significance of productivity shocks on real output fluctuations for the Euro area. The results are broadly supportive of standard RBC theory, with the finding that up to 60% of transitory fluctuations are caused by exogenous permanent productivity shocks. The model further finds that productivity shocks have useful explanatory power in illuminating certain macroeconomic historical episodes, in contrast to monetary and inflation shocks, which appear to have played a relatively minor role in driving output fluctuations. |
| Keywords: | Stochastic Trends, Balanced Growth, Cointegration, Open Economy. |
| JEL: | C32 E32 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2006_20&r=dge |
| By: | Fabrizio Perri; Alessandra Fogli |
| Abstract: | The early 1980s marked the onset of two striking features of the current world macro-economy: the fall in US business cycle volatility (the "great moderation") and the large and persistent US external imbalance. In this paper we argue that an external imbalance is a natural consequence of the great moderation. If a country experiences a fall in volatility greater than that of its partners, its relative incentives to accumulate precautionary savings fall and this results in an equilibrium permanent deterioration of its external balance. To assess how much of the current US imbalance can be explained by this channel, we consider a standard two country business cycle model in which households are subject to country specific shocks they cannot perfectly insure against. The model suggests that a fall in business cycle volatility like the one observed for the US relatively to other major economies can account for about 20% of the current total US external imbalance. |
| JEL: | F32 F34 F41 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12708&r=dge |
| By: | Antoine Martin; Michael Orlando; David Skeie |
| Abstract: | In a simple search model of money, we study a special kind of memory that gives rise to an arrangement resembling a payment network. Specifically, we assume that agents can pay a cost to access a central database that tracks payments made and received. Incentives must be provided to agents to access the central database and to produce when they participate in this arrangement. We also study policies that can loosen these incentive constraints. In particular, we show that a "no-surcharge" rule has good incentive properties. Finally, we compare our model with that of Cavalcanti and Wallace. |
| Keywords: | Payment systems ; Money ; Econometric models |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:263&r=dge |
| By: | Milani, Fabio |
| Abstract: | This paper estimates a monetary DSGE model with learning introduced from the primitive assumptions. The model nests infinite-horizon learning and features, such as habit formation in consumption and inflation indexation, that are essential for the model fit under rational expectations. I estimate the DSGE model by Bayesian methods, obtaining estimates of the main learning parameter, the constant gain, jointly with the deep parameters of the economy. The results show that relaxing the assumption of rational expectations in favor of learning may render mechanical sources of persistence superfluous. In particular, learning appears to be a crucial determinant of inflation inertia. |
| JEL: | G00 G0 |
| Date: | 2006–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:809&r=dge |
| By: | David Cook; Hiromi Nosaka |
| Abstract: | In this paper, we model a dynamic general equilibrium model of a small open developing economy. We model labor markets as including both formal and informal urban employment as well as rural employment. We find that modelling dual labor markets helps explain why output in developing economies may fall even as labor inputs remain constant during financial crises. An external financial shock may lead to a reallocation of labor from productive formal sectors of the economy to less productive informal sectors. |
| Keywords: | Labor market |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-36&r=dge |
| By: | Michel Normandin (IEA, HEC Montréal); Bruno Powo Fosso |
| Abstract: | This paper documents the relative importance of global and country-specific shocks for international business cycles. For this purpose, we rely on a symmetric twocountry, dynamic, general-equilibrium model with costly, incomplete, international financial markets. We also relate exogenous technologies and government expenditures to unobservable common and idiosynchratic components, and apply a Kalman filter to extract the associated global and country-specific shocks. We show that the baseline parametrization of the model, including all shocks, closely matches the cyclical fluctuations of key macroeconomic variables for the United States and a non-US aggregate over the post-1975 period. We then experiment alternative parametrizations, isolating the effects of each shock, and find that country-specific technology shocks constitute a prime determinant of international business cycles. Also, global technology shocks have marginal contributions, whereas global and country-specific government-expenditure shocks have negligible effects on cyclicalfluctuations. |
| Keywords: | General Equilibrium, Kalman Filter, Symmetric Economies. |
| JEL: | F32 F41 C32 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:iea:carech:0507&r=dge |
| By: | Marco Del Negro; Frank Schorfheide |
| Abstract: | In Bayesian analysis of dynamic stochastic general equilibrium (DSGE) models, prior distributions for some of the taste-and-technology parameters can be obtained from microeconometric or presample evidence, but it is difficult to elicit priors for the parameters that govern the law of motion of unobservable exogenous processes. Moreover, since it is challenging to formulate beliefs about the correlation of parameters, most researchers assume that all model parameters are independent of each other. We provide a simple method of constructing prior distributions for a subset of DSGE model parameters from beliefs about the moments of the endogenous variables. We use our approach to investigate the importance of nominal rigidities and show how the specification of prior distributions affects our assessment of the relative importance of different frictions. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-16&r=dge |
| By: | Vitek, Francis |
| Abstract: | This paper develops and estimates a dynamic stochastic general equilibrium model of a closed economy which provides a quantitative description of the monetary transmission mechanism, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption and labour supply, adjustment costs in housing and capital investment, and variable capital utilization. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium which abstracts from long run balanced growth, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and unobserved components are jointly estimated with a novel Bayesian full information maximum likelihood procedure, conditional on prior information concerning the values of parameters and trend components. |
| Keywords: | Stance of monetary policy; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation |
| JEL: | C11 E52 C13 E37 C32 |
| Date: | 2006–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:801&r=dge |
| By: | Vitek, Francis |
| Abstract: | This paper develops and estimates a dynamic stochastic general equilibrium model of a small open economy which provides a quantitative description of the monetary transmission mechanism, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption and labour supply, adjustment costs in housing and capital investment, and variable capital utilization. Incomplete exchange rate pass through is generated by monopolistic competition and staggered reoptimization in the import market. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium which abstracts from long run balanced growth, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and unobserved components are jointly estimated with a novel Bayesian full information maximum likelihood procedure, conditional on prior information concerning the values of parameters and trend components. |
| Keywords: | Stance of monetary policy; Small open economy; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation |
| JEL: | C11 E52 F41 C13 F47 C32 |
| Date: | 2006–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:802&r=dge |
| By: | Lawrence J. Christiano; Joshua M. Davis |
| Abstract: | Using “business cycle accounting,” Chari, Kehoe, and McGrattan (2006) 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 business cycle accounting overturn Chari, Kehoe, and McGrattan’s conclusions. Second, one way that shocks to the intertemporal wedge affect 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 business cycle accounting. Chari, Kehoe, and McGrattan potentially understate the importance of these shocks by adopting the extreme position that spillover effects are zero. |
| Keywords: | Business cycles |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0612&r=dge |
| By: | James Albrecht (Georgetown University, IFAU Uppsala, CESifo and IZA Bonn); Gerard J. van den Berg (Free University Amsterdam, IFAU Uppsala, CEPR, IFS and IZA Bonn); Susan Vroman (Georgetown University, IFAU Uppsala, CESifo and IZA Bonn) |
| Abstract: | The Swedish adult education program known as the Knowledge Lift (1997-2002) was unprecedented in its size and scope, aiming to raise the skill level of large numbers of lowskill workers. This paper evaluates the potential effects of this program on aggregate labor market outcomes. This is done by calibrating an equilibrium search model with heterogeneous worker skills using pre-program data and then forecasting the program impacts. We compare the forecasts to observed aggregate labor market outcomes after termination of the program. |
| Keywords: | job search, returns to education, program evaluation, wages, unemployment, Swedish labor market, calibration |
| JEL: | J21 J64 J31 J24 I21 C31 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2385&r=dge |
| By: | Monique Florenzano (Centre d'Economie de la Sorbonne); Stella Kanellopoulou (Centre d'Economie de la Sorbonne); Yannis Vailakis (Centre d'Economie de la Sorbonne) |
| Abstract: | This paper studies a simple stochastic two-period general equilibrium model with money, an incomplete market of nominal assets, and a competitive banking system, intermediate between consumers and a Central Bank. There is a finite number of agents, consumers and banks. Default is not permitted. The public policy instruments are, besides real taxes implicit in the model, public debt and creation of money, both implemented at the first period. The equilibrium existence is established under a "Gains to trade" hypothesis and the assumption that banks have a nonzero endowment of money at each date-event of the model. |
| Keywords: | Competitive banking system, incomplete markets, nominal assets, money, monetary equilibrium, cash-in-advance constraints, public debt. |
| JEL: | C61 C62 D20 D46 D51 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:b06068&r=dge |
| By: | Vitek, Francis |
| Abstract: | This paper develops and estimates a dynamic stochastic general equilibrium model of a closed economy which approximately accounts for the empirical evidence concerning the monetary transmission mechanism, as summarized by impulse response functions derived from an estimated structural vector autoregressive model, while dominating that structural vector autoregressive model in terms of predictive accuracy. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption, adjustment costs in investment, and variable capital utilization. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and trend components are jointly estimated with a novel Bayesian full information maximum likelihood procedure. |
| Keywords: | Monetary policy analysis; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation |
| JEL: | C11 E52 C13 E37 C32 |
| Date: | 2006–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:797&r=dge |
| By: | Michel Normandin (IEA, HEC Montréal); Martin Boileau |
| Abstract: | Several authors argue that international real business cycle (IRBC) models with incomplete financial markets offer a good explanation of the ranking of cross-country correlations. Unfortunately, this conclusion is suspect, because it is commonly based on an analysis of the near steady state dynamics using a linearized system of equations. The baseline IRBC model with incomplete financial markets does not possess a unique deterministic steady state and, as a result, its linear system of difference equations is not stationary. We show that the explanation of the ranking of cross-country correlations is robust to modifications that ensure a unique steady state and a stationary system of linear difference equations. We find, however, that the modifications affect the quantitative predictions regarding key macroeconomic variables. |
| Keywords: | Incomplete markets, stationarity, cross-country correlations, wealth effects. |
| JEL: | F32 G15 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:iea:carech:0503&r=dge |
| 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. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:380&r=dge |
| By: | Vitek, Francis |
| Abstract: | This paper develops and estimates a dynamic stochastic general equilibrium model of a small open economy which approximately accounts for the empirical evidence concerning the monetary transmission mechanism, as summarized by impulse response functions derived from an estimated structural vector autoregressive model, while dominating that structural vector autoregressive model in terms of predictive accuracy. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption, adjustment costs in investment, and variable capital utilization. Incomplete exchange rate pass through is generated by monopolistic competition and staggered reoptimization in the import market. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and trend components are jointly estimated with a novel Bayesian full information maximum likelihood procedure. |
| Keywords: | Monetary policy analysis; Inflation targeting; Small open economy; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation |
| JEL: | C11 E52 F41 C13 F47 C32 |
| Date: | 2006–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:800&r=dge |
| By: | Sullivan, Paul |
| Abstract: | This paper examines career choices using a dynamic structural model that nests a job search model within a human capital model of occupational and educational choices. Individuals in the model decide when to attend school and when to move between firms and occupations over the course of their career. Workers search for suitable wage and non-pecuniary match values at firms across occupations given their heterogeneous skill endowments and preferences for employment in each occupation. Over the course of their careers workers endogenously accumulate firm and occupation specific human capital that affects wages differently across occupations. The parameters of the model are estimated with simulated maximum likelihood using data from the 1979 cohort of the National Longitudinal Survey of Youth. The structural parameter estimates reveal that both self-selection in occupational choices and mobility between firms account for a much larger share of total earnings and utility than the combined effects of firm and occupation specific human capital. Eliminating the gains from matching between workers and occupations would reduce total wages by 30%, eliminating the gains from job search would reduce wages by 19%, and eliminating the effects of firm and occupation specific human capital on wages would reduce wages by only 2.7%. |
| Keywords: | occupational choice; job search; human capital; dynamic programming models |
| JEL: | I21 J62 J24 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:861&r=dge |
| By: | Gerhard Glomm (Indiana University Bloomington); Daiji Kawaguchi (Hitotsubashi University); Facundo Sepulveda (Universidad de Santiago de Chile) |
| Abstract: | This paper examines a revenue neutral green tax reform along the lines of the Double Dividend hypothesis. Using a dynamic general equilibrium model calibrated to the US economy, we find that increasing gasoline taxes and using the revenue to reduce capital income taxes does indeed deliver both types of welfare gains: from higher consumption of market goods (an efficiency dividend), and from a better environmental quality (a green dividend), even though in the new steady state environmental quality may worsen. We also find that, given the available evidence on how much households are willing to pay for improvements in air quality, the size of the green dividend is very small in absolute magnitude, and much smaller than the efficiency dividend. |
| Keywords: | Green taxes, Double Dividends, Capital Accumulation, Welfare |
| JEL: | E6 H2 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2006017&r=dge |
| By: | de Walque, Gregory; Smets, Frank; Wouters, Rafael |
| Abstract: | Using Bayesian likelihood methods, this paper estimates a dynamic stochastic general equilibrium model with Taylor contracts and firm-specific factors in the goods market on euro-area data. The paper shows how the introduction of firmspecific factors improves the empirical fit of the model and reduces the estimated contract length to a duration of four quarters, which is more consistent with the empirical evidence on average price durations in the euro area. However, in order to obtain this result, the estimated real rigidity is very large, either in the form of a very large constant elasticity of substitution between goods or in the form of an endogenous elasticity of substitution that is very sensitive to the relative price. Finally, the paper also investigates the implications of these estimates for the distribution of prices and quantities across the various goods sectors. |
| JEL: | G00 G0 |
| Date: | 2006–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:810&r=dge |
| By: | Erceg, Christopher; Guerriei, Luca; Gust, Christopher |
| Abstract: | In this paper, we describe a new multicountry open economy SDGE model named "SIGMA" that we have developed as a quantitative tool for policy analysis. We compare SIGMA's implications to those of an estimated large-scale econometric policy model (the FRB/Global model) for an array of shocks that are often examined in policy simulations. We show that SIGMA's implications for the near-term responses of key variables are generally similar to those of FRB/Global. Nevertheless, some quantitative disparities between the two models remain due to certain restrictive aspects of SIGMA's optimization-based framework. We conclude by using long-term simulations to illustrate some areas of comparative advantage of our SDGE modeling framework. |
| JEL: | G00 G0 |
| Date: | 2006–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:813&r=dge |
| By: | Yaz Terajima |
| Abstract: | The author quantitatively studies the interaction between education and occupation choices and its implication for the relationship between the changes in earnings inequality and the changes in wealth inequality in the United States over the 1983–2001 period. Among households whose head is a college graduate, the ratio of average household earnings between the self-employed and workers increased by 57 per cent. At the same time, the ratio of the average household wealth increased by 137 per cent. These findings suggest that both earnings and wealth inequality increased over this period. Did this change in relative average earnings lead to the change in relative average wealth? The author builds on a model of wealth distribution to include education and occupation choices, where earnings opportunities are dictated by productivity processes that are education-occupation specific. By calibrating these productivity processes to match the earnings observations separately for 1983 and 2001, the author quantitatively derives the model-implied changes in wealth inequality between different education-occupation groups of households. The results show that this exercise leads to one-third of the change in the relative average wealth between college self-employed and college worker households. |
| Keywords: | Economic models; Labour markets |
| JEL: | D31 I21 J23 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-40&r=dge |
| By: | Philippe Bacchetta; Eric van Wincoop |
| Abstract: | The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate differential, is negatively related to the subsequent change in the exchange rate. This forward discount puzzle implies that excess returns on foreign currency investments are predictable. In this paper we investigate to what extent incomplete information processing can explain this puzzle. We consider two types of incompleteness: infrequent and partial information processing. We calibrate a two-country general equilibrium model to the data and show that incomplete information processing can fully match the empirical evidence. It can also account for several related empirical phenomena, including that of "delayed overshooting." We show that incomplete information processing is consistent both with evidence that little capital is devoted to actively managing short-term currency positions and with a small welfare gain from active portfolio management. The gain is small because exchange rate changes are very hard to predict. The welfare gain is easily outweighed by a small cost of active portfolio management. |
| Keywords: | Foreign exchange |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-35&r=dge |
| By: | Gauti B. Eggertsson |
| Abstract: | Can government policies that increase the monopoly power of firms and the militancy of unions increase output? This paper studies this question in a dynamic general equilibrium model with nominal frictions and shows that these policies are expansionary when certain "emergency" conditions apply. I argue that these emergency conditions-zero interest rates and deflation-were satisfied during the Great Depression in the United States. Therefore, the New Deal, which facilitated monopolies and union militancy, was expansionary, according to the model. This conclusion is contrary to the one reached by Cole and Ohanian, who argue that the New Deal was contractionary. The main reason for this divergence is that the current model incorporates nominal frictions so that inflation expectations play a central role in the analysis. The New Deal has a strong effect on inflation expectations in the model, changing excessive deflation to modest inflation, thereby lowering real interest rates and stimulating spending. |
| Keywords: | Financial crises ; Depressions ; Inflation (Finance) ; Economic forecasting |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:264&r=dge |