|
on Dynamic General Equilibrium |
| By: | Fogli, Alessandra; Perri, Fabrizio |
| 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. |
| Keywords: | business cycle volatility; current account; net foreign asset position; precautionary saving |
| JEL: | F32 F34 F41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6010&r=dge |
| By: | Russell Cooper; John Haltiwanger; Jonathan L. Willis |
| Abstract: | This paper studies worker and job flows at the establishment and aggregate levels. The paper is built around a set of facts concerning the variability of unemployment and vacancies in the aggregate, the distribution of net employment growth and the comovement of hours and employment growth at the establishment level. A search model with frictions in hiring and firing is used as a framework to understand these observations. Notable features of this search model include non-convex costs of posting vacancies, establishment level profitability shocks and a contracting framework that determines the response of hours and wages to shocks. We specify and estimate the parameters of the search model using simulated method of moments to match establishment-level and aggregate observations. |
| Keywords: | Employment ; Unemployment ; Hours of labor |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp06-14&r=dge |
| By: | Fernando Alvarez; Marcelo Veracierto |
| Abstract: | Fixed-term employment contracts have been introduced in number of European countries as a way to provide flexibility to economies with high employment protection levels. We introduce these contracts into the equilibrium search model in Alvarez and Veracierto (1999), a version of the Lucas and Prescott island model, adapted to have undirected search and variable labor force participation. We model a contract of length J as a tax on separations of workers with tenure higher than J. We show a version of the welfare theorems, and characterize the efficient allocations. This requires solving a control problem, whose solution is characterized by two dimensional inaction sets. For J=1 these contracts are equivalent to the case of firing taxes, and for large J they are equivalent to the laissez-faire case. In a calibrated verion of the model, we find that temporary contracts with J equivalent to three years length close about half of the gap between those two extremes. |
| JEL: | E24 J3 J31 J63 J64 J65 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12791&r=dge |
| By: | Jean Boivin; Marc Giannoni |
| Abstract: | Standard practice for the estimation of dynamic stochastic general equilibrium (DSGE) models maintains the assumption that economic variables are properly measured by a single indicator, and that all relevant information for the estimation is summarized by a small number of data series. However, recent empirical research on factor models has shown that information contained in large data sets is relevant for the evolution of important macroeconomic series. This suggests that conventional model estimates and inference based on estimated DSGE models might be distorted. In this paper, we propose an empirical framework for the estimation of DSGE models that exploits the relevant information from a data-rich environment. This framework provides an interpretation of all information contained in a large data set, and in particular of the latent factors, through the lenses of a DSGE model. The estimation involves Markov-Chain Monte-Carlo (MCMC) methods. We apply this estimation approach to a state-of-the-art DSGE monetary model. We find evidence of imperfect measurement of the model's theoretical concepts, in particular for inflation. We show that exploiting more information is important for accurate estimation of the model's concepts and shocks, and that it implies different conclusions about key structural parameters and the sources of economic fluctuations. |
| JEL: | C10 C32 C53 E01 E32 E37 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberte:0332&r=dge |
| By: | Sylvain Leduc; Keith Sill |
| Abstract: | An equilibrium model is used to assess the quantitative importance of monetary policy for the post-1984 decline in U.S. inflation and output volatility. The principal finding is that monetary policy played a substantial role in reducing inflation volatility, but a small role in reducing real output volatility. The model attributes much of the decline in real output volatility to smaller TFP shocks. We also investigate the pattern of output and inflation volatility under an optimal monetary policy counterfactual. We find that real output volatility would have been somewhat lower, and inflation volatility substantially lower, had monetary policy been set optimally. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:873&r=dge |
| By: | Benigno, Pierpaolo; Woodford, Michael |
| 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. |
| Keywords: | optimization |
| JEL: | C61 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5964&r=dge |
| By: | Eran Yashiv (Tel Aviv University, CEPR and IZA Bonn) |
| Abstract: | The Beveridge curve depicts a negative relationship between unemployed workers and job vacancies, a robust finding across countries. The position of the economy on the curve gives an idea as to the state of the labour market. The modern underlying theory is the search and matching model, with workers and firms engaging in costly search leading to random matching. The Beveridge curve depicts the steady state of the model, whereby inflows into unemployment are equal to the outflows from it, generated by matching. |
| Keywords: | business cycle, job search, matching function, Phillips curve, unemployment, vacancies, wage inflation |
| JEL: | E24 E32 J63 J64 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2479&r=dge |
| By: | Tali Regev |
| Abstract: | Under federal-state law workers who quit a job are not entitled to receive unemployment insurance benefits. To show how the existence of the uninsured affects wages and employment, I extend an equilibrium search model to account for two types of unemployed workers: those who are currently receiving unemployment benefits and for whom an increase in unemployment benefits reduces the incentive to work, and those who are currently not insured. For these, work provides an added value in the form of future eligibility, and an increase in unemployment benefits increases their willingness to work. Incorporating both types into a search model permits me to solve analytically for the endogenous wage dispersion and insurance rate in the economy. I show that, in general equilibrium when firms adjust their job creation margin, the wage dispersion is reduced and the overall effect of benefits can be signed: higher unemployment benefits increase average wages and decrease the vacancy-to-unemployment ratio. |
| Keywords: | Unemployment insurance |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-48&r=dge |
| By: | Kolm, Ann-Sofie (Dept. of Economics, Stockholm University); Tonin, Mirco (Institute for International Economic Studies) |
| Abstract: | We study the general equilibrium effects of in-work beneifts in a search framework. Introducing in-work benefits reduces equilibrium unemployment, moderate wages, and boost participation and search. Total employment increases as a result. Considering in-work benefits in a general equilibrium setting reveals that employment increases mainly though the impact on job creation. This is in contrast to what is usually stressed, namely that employment increases because individuals are provided with incentives to take a job. |
| Keywords: | In-work benefits; unemployment; participation |
| JEL: | J21 J38 |
| Date: | 2006–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2006_0012&r=dge |
| By: | V. V. Chari; Patrick J. Kehoe; Ellen R. McGrattan |
| Abstract: | We make two comparisons relevant for the business cycle accounting approach. We show that in theory representing the investment wedge as a tax on investment is equivalent to representing this wedge as a tax on capital income as long as the probability distributions over this wedge in the two representations are the same. In practice, convenience dictates differing probability distributions over this wedge in the two representations. Even so, the quantitative results under the two representations are essentially identical. We also compare our methodology, the CKM methodology, to an alternative one used in Christiano and Davis (2006) as well as by us in early incarnations of the business cycle accounting approach. We argue that the CKM methodology rests on more secure theoretical foundations. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:647&r=dge |
| By: | Mikael Carlsson; Stefan Eriksson; Nils Gottfries |
| Abstract: | Although search-matching theory has come to dominate labor economics in recent years, few attempts have been made to compare the empirical relevance of search-matching theory to efficiency wage and bargaining theories, where employment is determined by labor demand. In this paper we formulate an empirical equation for net job creation, which encompasses search-matching theory and a standard labor demand model. Estimation on firm-level data yields support for the labor demand model, wages and product demand affect job creation, but we find no evidence that unemployed workers contribute to job creation, as predicted by search-matching theory. |
| Keywords: | job creation, involuntary unemployment, search-matching, labor demand, competitiveness |
| JEL: | E24 J23 J64 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1866&r=dge |
| By: | Ellen R. McGrattan; Edward C. Prescott |
| Abstract: | We develop a general equilibrium multicountry model and use it to evaluate concerns of high U.S. current account deficits and a declining net U.S. investment position. We introduce technology capital which can be used by multinationals in some or all of their domestic and foreign operations. Prime examples are brand equity and patents. This capital is intangible and is therefore expensed rather than capitalized. The expensing of the investment implies that there are differences in reported and actual balance of payments and net asset positions. Although our model economy has efficient domestic and international capital markets, the predicted equilibrium paths for the reported series exhibit similar behavior to the observed U.S. time series. Thus, on the basis of our model’s quantitative predictions, we conclude that there is no prima facie evidence that the large current account deficits are a harbinger of a future crisis. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:646&r=dge |
| By: | Wei Xiong; Hongjun Yan |
| Abstract: | This paper presents a dynamic equilibrium model of bond markets, in which two groups of agents hold heterogeneous expectations about future economic conditions. Our model shows that heterogeneous expectations can not only lead to speculative trading, but can also help resolve several challenges to standard representative-agent models of the yield curve. First, the relative wealth fluctuation between the two groups of agents caused by their speculative positions amplifies bond yield volatility, thus providing an explanation for the "excessive volatility puzzle" of bond yields. In addition, the fluctuation in the two groups' expectations and relative wealth also generates time-varying risk premia, which in turn can help explain the failure of the expectation hypothesis. These implications, essentially induced by trading between agents, highlight the importance of incorporating heterogeneous expectations into economic analysis of bond markets. |
| JEL: | E43 G12 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12781&r=dge |
| By: | Jeffrey R. Campbell; Zvi Hercowitz |
| Abstract: | Aggressive deregulation of the mortgage market in the early 1980s triggered innovations that greatly reduced the required home equity of U.S. households. This allowed households to cash-out a large part of accumulated equity, which equaled 71 percent of GDP in 1982. A borrowing surge followed: Household debt increased from 43 to 62 percent of GDP in the 1982- 2000 period. What are the welfare implications of such a reform for borrowers and savers? This paper uses a calibrated general equilibrium model of lending from the wealthy to the middle class to evaluate these effects quantitatively. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-06-27&r=dge |
| By: | Lee Ohanian; Andrea Raffo; Richard Rogerson |
| Abstract: | We document large differences in trend changes in hours worked across OECD countries over the period 1956-2004. We then assess the extent to which these changes are consistent with the intratemporal first order condition from the neoclassical growth model. We find large and trending deviations from this condition, and that the model can account for virtually none of the changes in hours worked. We then extend the model to incorporate observed changes in taxes. Our findings suggest that taxes can account for much of the variation in hours worked both over time and across countries. |
| Keywords: | Hours of labor ; Labor supply ; 401(k) plans |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp06-16&r=dge |