nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2006‒12‒01
eleven papers chosen by
Christian Zimmermann
University of Connecticut

  1. Stage-specific technology shocks and employment : Could we reconcile with the RBC models ? By Chahnez Boudaya
  2. Vintage Capital and Expectations Driven Business Cycles By Floden, Martin
  3. Equilibrium of incomplete markets with money and intermediate banking system By Monique Florenzano; Stella Kanellopoulou; Yannis Vailakis
  4. The Role of Expectations in a Specialization-driven Growth Model with Endogenous Technology Choice By Shiro Kuwahara; Akihisa Shibata
  5. Unequal Opportunities and Human Capital Formation By Daniel Mejía; Marc St-Pierre
  6. Growth, Sectoral Composition, and the Wealth of Nations By Jaime Alonso-Carrera; Xavier Raurich
  7. Public jobs creation and unemployment dynamics By Céline Choulet
  8. Borders, Endogenous Market Access and Growth By Tomasz Michalski
  9. General Equilibrium Dynamics of Multi-Sector Growth Models By Bjarne S. Jensen; Mogens E. Larsen
  10. Existence of Bifurcation in Macroeconomic Dynamics: Grandmont was Right By William Barnett; Yijun He
  11. Banks, Liquidity Crises and Economic Growth By Alejandro Gaytan; Romain Ranciere

  1. By: Chahnez Boudaya (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: This paper analyses the response of labor input to technology shocks in an estimated two-stage production framework with both price and wage stickiness and stage-specific shocks to productivity. Our model features a vertical input-output structure with imperfect mobility of labors across stages. The estimation uses the maximum likelihood technique applied to the post-war US data. Our findings could easily match the standard RBC models predictions : A shock to productivity in the intermediate good production stage i) leads to an increase in both stage-specific labor and the aggregate labor and ii) explains a large proportion of the volatility of both the real GDP and the aggregate labor. Besides, regarding the output-labor correlation, the model does a very good job in matching the data.
    Keywords: RBC models, sticky prices, sticky wages, production chain, employment, technology shocks, sectoral comovements.
    Date: 2006–11–23
  2. By: Floden, Martin (Dept. of Economics, Stockholm School of Economics)
    Abstract: This paper demonstrates that increased optimism about future productivity can generate an immediate economic expansion in a neoclassical model with vintage capital and variable capacity utilization. Previous research has documented that standard neoclassical models cannot generate a simultaneous increase in consumption, investment, and hours in response to news shocks, and that optimism in these models tends to reduce investment and hours. When technology is vintage specific, however, expectations of higher future productivity raise the demand for new vintages of capital relative to old capital. Capital depreciates faster when utilization is high, but this depreciation only affects installed capital. The cost of high depreciation therefore falls when the value of installed capital falls. It is demonstrated here that with standard parameter values, more optimism raises utilization, consumption, investment, hours, and output.
    Keywords: Expectations; News; Business cycles; Vintage capital; Capital-embodied technological change
    JEL: E13 E32
    Date: 2006–11–10
  3. By: Monique Florenzano (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Stella Kanellopoulou (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Yannis Vailakis (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: This paper studies a simple stochastic two-period general equilibrium exchange 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 non zero 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.
    Date: 2006–11–07
  4. By: Shiro Kuwahara (Institute of Economic Research, Kyoto University); Akihisa Shibata (Institute of Economic Research, Kyoto University)
    Abstract: Extending the Kim (1989) model of endogenous labor specialization to an overlapping generations model with an endogenous technology choice, we show in this paper that, when the market size and the fixed costs associated with the technologies with labor specialization are small, the growth pattern of this economy depends on worker expectations. In other words, if workers expect low returns of specific human capital, they will not invest in such capital, and the economy will be eventually locked in an underdevelopment trap. On the other hand, if they expect high returns of specific human capital, they invest in such capital, and, as a result, the economy can exhibit long-run growth.
    Keywords: Labor specialization, endogenous choice of technology, endogenous growth, development traps
    JEL: O11 O14 O41
    Date: 2006–11
  5. 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.
    Date: 2006–10–01
  6. By: Jaime Alonso-Carrera; Xavier Raurich
    Abstract: We characterize the dynamic equilibrium of a two-sector endogenous growth model with constant returns to scale. We assume that both sectors produce consumption and investment goods, and we introduce a minimum consumption requirement. In this model, economies with the same fundamentals but different endowments of capitals will converge to a common growth rate, although the long run level and sectoral composition of GDP will be different. Because total factor productivity depends on sectoral composition, capital endowments will also contribute to GDP by means of changing the sectoral composition. This suggests that the development accounting exercises should consider the endogeneity of total factor productivity when measuring the contribution of capital to GDP. Along the transition, the slope of the policy functions depends on the initial values of the capital stocks and of the minimum consumption requirement. This implies that the minimum consumption is a barrier to development and that economies initially similar may diverge along the transition.
    Keywords: sectorial composition, human capital, endogenous growth, two-sector growth model
    JEL: O41
    Date: 2006–06
  7. By: Céline Choulet (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: This paper raises the question of the dynamic effects of public spending in jobs on labor market performance. We use a dynamic matching model and study how public jobs creation affects endogenous workers' decisions to move on the labor market and private-sector firms' job creation and destruction decisions. We obtain that it exerts an attracting effect and a fiscal effect on the labor market that make the unemployment rate and job flows overshoot. As an empirical illustration, we estimate a SVAR model that focuses on the consequences of public job creations on unemployment, wages and job flows dynamics. We confirm our intuition : public employment has a significant ambiguous effect on private wages.
    Keywords: Public sector labor market, unemployment dynamics.
    Date: 2006–11–13
  8. By: Tomasz Michalski
    Abstract: We discuss the role of contracting impediments created by the existence of national borders on open economy growth. In a two-good neoclassical Ramsey growth model with lack of enforcement on international trade contracts we show that endogenous trading constraints with positive trade may arise on the transition path towards an open-economy steady state. These constraints may bind more severely low-income economies. Dynamic incentives to fulfill international contracts are easier to provide to high-income agents that have a stronger love-of-variety and investment motives to trade internationally. Investment in capital serves thus as a commitment device. The extent of the impediments may render countries unable to engage in international exchange at all, in effect keeping them in a poverty trap. Countries with dissimilar initial capital per capita may converge to different steady states. Contracting problems in international exchange may block the channel through which, as many researchers believe, international trade affects growth by increasing investment rates. The model provides a new explanation for the correlations observed in the data, for example that the trade/GDP ratio across countries is positively related with income per capita. Our model and its extensions add to the understanding of a number of puzzles (inter alia "the missing trade") in international economics. Using new data on trade credit in international transactions we provide correlations supporting the view that collection risks hinder international exchange. Policy implications stress the role of promoting contract enforcement and trade liberalization.
    Keywords: trade, growth, limited commitment, borders, poverty trap
    JEL: D86 F15 F34 F43 O16 O4
    Date: 2006–06
  9. By: Bjarne S. Jensen; Mogens E. Larsen
    Abstract: This paper analyzes Walrasian general equilibrium systems and calculates the static and dynamic solutions for competitive market equilibria. The Walrasian framework encompasses the basic multi-sector growth (MSG) models with neoclassical production technologies in N sectors (industries). The endogenous behavior of all the relative prices are analyzed in detail, as are sectorial allocations of the primary factors, labor and capital. Dynamic systems of Walrasian multi-sector economies and the family of solutions (time paths) for steady-state and persistent growth per capita are parametrically characterized. The technology parameters of the capital good industry are decisive for obtaining long-run per capita growth in closed (global) economies. Brief comments are offered on the MSG literature, together with apects on the studies of industrial (structural) evolution and economic history.
    Keywords: pareto effiency, walrasian equilibria, factor accumulation
    JEL: F11 F43 O40 O41
    Date: 2005–06
  10. By: William Barnett (Department of Economics, The University of Kansas); Yijun He (School of Economic Sciences, Washington State University)
    Abstract: Grandmont (1985) found that the parameter space of the most classical dynamic general-equilibrium macroeconomic models are stratified into an infinite number of subsets supporting an infinite number of different kinds of dynamics, from monotonic stability at one extreme to chaos at the other extreme, and with all forms of multiperiodic dynamics between. But Grandmont provided his result with a model in which all policies are Ricardian equivalent, no frictions exist, employment is always full, competition is perfect, and all solutions are Pareto optimal. Hence he was not able to reach conclusions about the policy relevance of his dramatic discovery. As a result, Barnett and He (1999, 2001, 2002) investigated a Keynesian structural model, and found results supporting Grandmont¡¯s conclusions within the parameter space of the Bergstrom- Wymer continuous-time dynamic macroeconometric model of the UK economy. That prototypical Keynesian model was produced from a system of second order differential equations. The model contains frictions through adjustment lags, displays reasonable dynamics fitting the UK economy¡¯s data, and is clearly policy relevant. In addition, initial results by Barnett and Duzhak (2006) indicate the possible existence of Hopf bifurcation within the parameter space of recent New Keynesian models. Lucas-critique criticism of Keynesian structural models has motivated development of Euler equations models having policy-invariant deep parameters, which are invariant to policy rule changes. Hence, we continue the investigation of policy-relevant bifurcation by searching the parameter space of the best known of the Euler equations general-equilibrium macroeconometric models: the Leeper and Sims (1994) model. We find the existence of singularity bifurcation boundaries within the parameter space. Although never before found in an economic model, our explanation of the relevant theory reveals that singularity bifurcation may be a common property of Euler equations models. These results further confirm Grandmont¡¯s views. Beginning with Grandmont¡¯s findings with a classical model, we continue to follow the path from the Bergstrom-Wymer policy-relevant Keynesian model, to New Keynesian models, and now to Euler equations macroeconomic models having deep parameters. Grandmont was right.
    Keywords: Bifurcation, inference, dynamic general equilibrium, Pareto optimality, Hopf bifurcation, Euler equations, Leeper and Sims model, singularity bifurcation, stability.
    JEL: C14 C22 E37 E32
    Date: 2006–11
  11. By: Alejandro Gaytan; Romain Ranciere
    Abstract: How do the liquidity functions of banks affect investment and growth at different stages of economic development? How do financial fragility and the costs of banking crises evolve with the level of wealth of countries? We analyze these issues using an overlapping generations growth model where agents can invest in a liquid storage technology or in a partially illiquid Cobb Douglas technology. By pooling liquidity risk, banks play a growth enhancing role in reducing inefficient liquidation of long term projects, but they may face liquidity crises associated with severe output losses. Middle income economies may find optimal to be exposed to liquidity crises, while poor and rich economies have more incentives to develop a fully covered banking system. Therefore, middle income economies could experience banking crises in the process of their development and, as they get richer, eventually converge to a financially safe long run steady state. The model also replicates the empirical fact of higher costs of banking crises for middle income economies. Finally, using GMM dynamic panel data techniques for a sample of 83 countries we show that growth implications of the model are consistent with the empirical facts.
    Keywords: OLG growth models, liquidity, financial intermediation, financial fragility, banking crises
    JEL: E44 G21 O11
    Date: 2005–06

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