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on Dynamic General Equilibrium |
| By: | Giorgio Primiceri (Economics Northwestern University); Ernst Schaumburg; Andrea Tambalotti |
| Abstract: | Disturbances affecting agents' intertemporal substitution are the key driving force of macroeconomic fluctuations. We reach this conclusion exploiting the asset pricing implications of an estimated general equilibrium model of the U.S. business cycle with a rich set of real and nominal frictions |
| Keywords: | Business Cycle, Fluctuations, Euler equation, shocks, frictions |
| JEL: | E30 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:355&r=dge |
| By: | Christian Haefke; Marcus Sonntag; Thijs van Rens |
| Abstract: | Shimer (2005) and Hall (2005) have documented the failure of standard labor market search models to match business cycle fluctuations in employment and unemployment. They argue that it is likely that wages are not adjusted as regularly as suggested by the model, which would explain why employment is more volatile than the model predicts. We explore whether this explanation is consistent with the data. The main insight is that the relevant wage data for the search model are not aggregate wages, but wages of newly hired workers. Preliminary results show that wages for those workers are much more volatile than aggregate wages, suggesting that other (real) frictions might be more important than wage stickiness |
| Keywords: | search model, cyclical properties, wage rigidities, volatility, wages |
| JEL: | E32 J30 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:773&r=dge |
| By: | Ruediger Bachmann (Department of Economics Yale University); Eduardo Engel; Ricardo Caballero |
| Abstract: | Microeconomic lumpiness matters for macroeconomics. According to our DSGE model, it is responsible for 92 percent of the smoothing in the investment response to aggregate shocks, and it introduces important nonlinearities and history dependance in business cycles and policy sensitivity. General equilibrium forces are responsible for the remaining 8 percent of smoothing and attenuate, but do not eliminate, aggregate nonlinearities. Not only is the lumpy model better micro-founded than the frictionless model, it also represents an improvement in terms of its ability to match conventional RBC moments, since it raises the volatility of consumption and employment to the levels observed in US data. The model also has distinct implications for the economy's response to large shocks and policy interventions. We illustrate these mechanisms by simulating the dynamics of an investment overhang episode. Our main methodological contribution is to develop a calibration procedure that combines data at different levels of aggregation (sectoral and aggregate) |
| Keywords: | Lumpy investment, RBC model,$(S,s)$ model, idiosyncratic and aggregate shocks, sectoral shocks, adjustment costs, inertia, nonlinearities and history dependence, moments matching. |
| JEL: | E10 E22 E30 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:775&r=dge |
| By: | Espen Henriksen (Economics GSIA, CMU); Stephen Spear |
| Abstract: | The question we ask is: within the set of a three-period-lived OLG economies with a stochastic endowment process, a stochastic dividend process, and sequentially complete markets, under what set of conditions may a set of government transfers dynamically Pareto dominate the laissez faire equilibrium? We start by characterizing perfect risk sharing and find that it implies a strongly stationary set of state-dependent consumption claims. We also derive the stochastic equivalent of the deterministic steady-state by steady-state optimal marginal rate of substitution. We show then that the risk sharing of the recursive competitive laissez faire equilibrium of any overlapping generations economy with weakly more than three generations is nonstationary and that risk is suboptimally shared. We then show that we can construct a sequence of consumption allocations that only depends on the exogenous state and which Pareto dominate the laissez faire allocations in an ex interim as well as ex ante sense. We also redefine conditional Pareto optimality to apply within this framework and show that under a broad set of conditions, there also exists a sequence of allocations that dominates the laissez faire equilibrium in this sense. Finally, we apply these tools and results to an economy where the endowment is constant, but where fertility is stochastic, i.e. the number of newborn individuals who enters the economy follows a Markov Process. |
| Keywords: | competitive equilibrium, stochastic overlapping generations |
| JEL: | D51 D52 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:35&r=dge |
| By: | Andre Kurmann (Economics UQAM); Nicolas Petrosky-Nadeau |
| Abstract: | Empirical evidence suggests that capital separation is an important phenomenon over and beyond depreciation and that reallocation is a costly and time-consuming process. In addition, both separation and reallocation rates display substantial variation over the business cycle. We build a dynamic general equilibrium model where capital separation occurs endogenously because of credit constraints and capital (re)allocation is costly due to search frictions and capital specificity. Compared to the frictionless counterpart but also compared to models of financial frictions without costly capital reallocation, our model matches surprisingly well the persistence in U.S. output growth. Furthermore, our model implies that productive capital stocks vary more than reported in the data, which has the potential to substantially reduce the volatility of technology shocks inferred from the Solow residual |
| Keywords: | Credit Market Frictions, Capital Reallocation, Investment, Business Cycles, Output Growth Persistence |
| JEL: | E22 E32 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:365&r=dge |
| By: | Giorgio Primiceri; Alejandro Justiniano (Board of Governors of the Federal Reserv public) |
| Abstract: | In this paper we investigate the sources of the important shifts in the volatility of U.S. macroeconomic variables in the postwar period. To this end, we propose the estimation of DSGE models allowing for time variation in the volatility of the structural innovations. We apply our estimation strategy to a large-scale model of the business cycle and …nd that investment speci…c technology shocks account for most of the sharp decline in volatility of the last two decades |
| Keywords: | Great Moderation, Stochastic Volatility, Investment Specific Technology Shock, Relative Price of Investment, DSGE Models |
| JEL: | E32 C32 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:353&r=dge |
| By: | Shigeru Fujita (Federal Reserve Bank of Philadelphia); Garey Ramey (UC San Diego) |
| Abstract: | In aggregate U.S. data, exogenous shocks to labor productivity induce highly persistent and hump-shaped responses to both the vacancy-unemployment ratio and employment. We show that the standard version of the Mortensen-Pissarides matching model fails to replicate this dynamic pattern due to the rapid responses of vacancies. We extend the model by introducing a sunk cost for creating new job positions, motivated by the well-known fact that worker turnover exceeds job turnover. In the matching model with sunk costs, vacancies react sluggishly to shocks, leading to highly realistic dynamics. |
| Keywords: | Unemployment, Vacancies, Labor Adjustment, Matching, |
| Date: | 2005–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsdec:2005-08&r=dge |
| By: | Nir Jaimovich (Economics UCSD); Sergio Rebelo |
| Abstract: | In this paper we propose a model that generates an expansion in response to good news about future total factor productivity (TFP) or investment-specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and preferences that exhibit a weak short-run income effect on the labor supply. These preferences nest, as special cases, the two classes of utility functions most widely used in the business cycle literature. Even though our model abstracts from negative productivity shocks, it generates recessions that resemble those in the post-war U.S. economy. Recessions are caused not by contemporaneous negative shocks but by lackluster news about the future TFP or investment-specific technical change |
| Keywords: | News, Future Shocks, Business Cycle |
| JEL: | E3 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:31&r=dge |
| By: | Shouyong Shi |
| Abstract: | In this article I briefly review recent developments in search theory. Particular attention is given to the framework of directed search. I first illustrate the inefficiency that arises in the equilibrium of standard (undirected) search models. Then I provide a formulation of directed search and show that the resulting equilibrium eliminates the inefficiency. Examples of directed search with price posting and auction are provided both for the market with a finite number of individuals and for a large market. After describing the application of search models in monetary theory, I conclude with a remark on the future research. |
| Keywords: | Search; Efficiency; Unemployment |
| JEL: | C78 E10 |
| Date: | 2006–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-273&r=dge |
| By: | Monique Ebell |
| Abstract: | This paper examines the business cycle properties of business cycle models with search frictions and wage bargaining which rely not only on labor, but also on capital in the production function. In the presence of capital, the choice of bargaining framework matters, even under perfect competition and constant returns to scale. In particular, under individual bargaining, the welfare theorems do not hold, due to a hold-up effect in capital and a hiring externality, so that solving a planner's problem is not sufficient. I examine the business cycle properties of the decentralized model with individual bargaining under alternative calibration strategies |
| Keywords: | Business Cycles, Wage Bargaining, Search Frictions, Capital |
| JEL: | E3 J2 J3 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:755&r=dge |
| By: | Pietro Garibaldi |
| Abstract: | This paper proposes a matching model that distinguishes between job creation by existing firms and job creation by firm entrants. The paper argues that vacancy posting and job destruction on the extensive margin, i.e. from firms that enter and exit the labour market, represents a potentially viable mechanism for understanding the cyclical properties of vacancies and unemployment. The model features both hiring freeze and bankruptcies, where the former represents a sudden shut down of vacancy posting at the firm level with labour downsizing governed by natural turnover. A bankrupt firm, conversely, shut down its vacancies and lay offs its stock of workers. Recent research in macroeconomics has shown that a calibration of the Mortensen and Pissarides matching model account for 10 percent of the cyclical variability of the vacancy unemployment ratio displayed by U.S. data. A calibration of the model that explicitly considers hiring freeze and bankruptcy can account for 20 to 35 percent of the variability displayed by the data |
| Keywords: | unemployment dynamics, matching models |
| JEL: | E32 J20 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:227&r=dge |
| By: | Guillaume Rocheteau (Federal Reserve Bank of Cleveland public); Peter Rupert; Karl Shell; Randall Wright |
| Abstract: | We study general equilibrium with nonconvexities. In these economies there exist sunspot equilibria without the usual assumptions needed in convex economies, and they have good welfare properties. Moreover, in these equilibria, agents act as if they have quasi-linear utility. Hence wealth effects vanish. We use this to construct a new model of monetary exchange. As in Lagos-Wright, trade occurs in both centralized and decentralized markets, but while that model requires quasi-linearity, we have general preferences. Given our specification looks much like the textbook Arrow-Debreu model, we think this constitutes progress on the classic problem of integrating money and general equilibrium theory. We also use the model to discuss another classic issue: the relation between inflation and unemployment |
| Keywords: | Money, Indivisibilities, Sunspots. |
| JEL: | E40 E50 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:833&r=dge |
| By: | Helge Braun (Department of Economics Northwestern University) |
| Abstract: | This paper estimates an identified VAR on US data to gauge the dynamic response of the job finding rate, the worker separation rate, and vacancies to monetary policy shocks. I develop a general equilibrium model that can account for the large and persistent responses of vacancies, the job finding rate, the smaller but distinct response of the separation rate, and the inertial response of inflation. The model incorporates labor market frictions, capital accumulation, and nominal price rigidities. Special attention is paid to the role of different propagation mechanisms and the impact of search frictions on marginal costs. Estimates of selected parameters of the model show that wage rigidity, moderate search costs, and a high value of non-market activities are important in explaining the dynamic response of the economy. The analysis extends to a broader set of aggregate shocks and can be used to understand and design monetary, labor market, and other policies in the presence of labor market frictions |
| Keywords: | Unemployment, Inflation, Labor Market Frictions |
| JEL: | E30 J63 J64 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:87&r=dge |
| By: | António Antunes (Banco de Portugal, Departamento de Estudos Economicos, and Faculdade de Economia, Universidade Nova de Lisboa); Tiago Cavalcanti (Departamento de Economia, Universidade Federal de Pernambuco, INOVA, Faculdade de Economia, Universi-dade Nova de Lisboa.); Anne Villamil (Department of Economics, University of Illinois at Urbana- Champaign) |
| Abstract: | This paper establishes the existence of a stationary equilibrium and a procedure to compute solutions to a class of dynamic general equilibrium models with two important features. First, occupational choice is determined endogenously as a function of heterogeneous agent type, which is defined by an agent's managerial ability and capital bequest. Heterogeneous ability is exogenous and independent across generations. In contrast, bequests link generations and the distribution of bequests evolves endogenously. Second, there is a financial market for capital loans with a deadweight intermediation cost and a repayment incentive constraint. The incentive constraint induces a non-convexity. The paper proves that the competitive equilibrium can be characterized by the bequest distribution and factor prices, and uses the monotone mixing condition to ensure that the stationary bequest distribution that arises from the agent's optimal behavior across generations exists and is unique. The paper next constructs a direct, non-parametric approach to compute the stationary solution. The method reduces the domain of the policy function, thus reducing the computational complexity of the problem. |
| Keywords: | Existence; Computation; Dynamic general equilibrium; Non-convexity |
| JEL: | C62 C63 E60 G38 |
| URL: | http://d.repec.org/n?u=RePEc:sca:scaewp:0611&r=dge |
| By: | Francois Gourio; Pierre-Alexandre Noual (Department of Economics University of Chicago) |
| Abstract: | This paper attempts to reconcile the high apparent aggregate elasticity of labor supply with small micro estimates. We elaborate on Rogerson's seminal work (1988) and show that his results rely neither on complete markets nor on lotteries, but rather on the indivisibility and the fact that the workforce is homogeneous at the margin. We derive two robust implications of a setup with indivisible labor but without lotteries, using either a complete markets model or an incomplete markets model (solved numerically). (1) Agents with reservation wages far above or below the market wage are less responsive (in labor supply) to the business cycle than agents whose reservation wage is around the market wage. (2) The aggregate elasticity is given by the marginal homogeneity of the workforce. We test implication (1) using the PSID and find support for it. We build an incomplete markets model and calibrate it to cross-sectional moments of hours worked. We show that it can reproduce the feature (1). This allows us to use the model to evaluate the importance of feature (2), i.e. to estimate the aggregate elasticity of labor supply implied by the marginal homogeneity. |
| Keywords: | indivisible labor, reservation wage distribution, labor supply, business cycles |
| JEL: | E24 E32 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:509&r=dge |
| By: | Fabio Ghironi; Jaewoo Lee; Alessandro Rebucci (Research Department International Monetary Fund) |
| Abstract: | This paper explores the valuation channel of external adjustment in a two-country dynamic stochastic general equilibrium model (DSGE) with international equity trading. The theoretical model we set up matches key moments of the data for the United States at business cycle frequency at least as well as standard models of international real business cycles (RBCs). In our theoretical analysis, we find that two-asset trading is necessary for a valuation channel of external adjustment to emerge. However, other features of the economy, such as on the nature of the shock that generates the external imbalance and other features of the economy – the extent of nominal rigidity and the size of finacial frictions – determine the magnitude and significance of this channel of adjustment. The relative importance of the valuation channel is larger the higher the degree of nominal rigidity and the higher finacial intermediation costs. Monetary policy shocks have no valuation effects with flexible prices and trade only in equity. Specifying the theoretical model with net foreign assets different from zero in necessary to start matching satisfactorily empirical moments of changes in the US net foreign asset position. |
| Keywords: | External adjustment, Portfolio Models, Valuation Channel, SDGE Models |
| JEL: | F32 F41 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:195&r=dge |
| By: | Martin Gonzalez-Eiras (Universidad de San Andres); Dirk Niepelt |
| Abstract: | In this paper we analyze tax and transfer choices in an OLG economy with capital accumulation and endogenous growth coming from public investment, such as education. We solve for a Markov perfect equilibrium when electoral competition targets the votes of young and old households. We find that when calibrating the model to match US data, it predicts levels of intergenerational transfers and of public investments that are similar to the observed ones. Furthermore the Ramsey policy for the same parameters would call for both generations to be taxed to finance public investment. If the political process internalized the benefits that public investment has on future generations, growth would be twice as high as currently observed |
| Keywords: | endogenous growth; intergenerational transfers; education; probabilistic voting; Markov perfect equilibrium |
| JEL: | E62 H55 O41 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:712&r=dge |
| By: | Andrea Raffo (Economic Research Federal Reserve Bank, Kansas City) |
| Abstract: | Conventional two-country RBC models interpret countercyclical net exports as reflecting, in large part, the dynamics of capital. I show that, quantitatively, theoretical economies rely on counterfactual terms of trade effects: trade fluctuations, on the contrary, are driven primarily by consumption smoothing, thus generating procyclical net trade in goods. I then consider a class of preferences that embeds home production in a reduced form: consumption volatility increases so that countercyclical net exports reflect primarily a strong relation between import of goods and income, as in the data. The major discrepancy between theory and data concerns the variability of international prices. |
| Keywords: | Net exports; Home production; Consumption volatility. |
| JEL: | E32 F32 F41 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:128&r=dge |
| By: | Lutz Hendricks (Iowa State University) |
| Abstract: | This paper investigates the role of discount rate heterogeneity for wealth inequality. The key idea is to infer the distribution of preference parameters from the observed age profile of wealth inequality. The contribution of preference heterogeneity to wealth inequality can then be measured using a quantitative life-cycle model. I find that discount rate heterogeneity increases the Gini coefficient of wealth by 0.06 to 0.11. The share of wealth held by the richest 1% of households rises by 0.03 to 0.13. The larger changes occur when altruistic bequests are large and when preferences are strongly persistent across generations. Discount rate heterogeneity also helps account for the large wealth inequality observed among households with similar lifetime earnings |
| Keywords: | Wealth inequality; preference heterogeneity |
| JEL: | E2 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:124&r=dge |
| By: | Ellen R. McGrattan; Eduard C. Prescott (Federal Reserve Bank of MInneapolis) |
| Abstract: | During the 1990s, market hours in the United States rose dramatically. The rise in hours occurred as gross domestic product (GDP) per hour was declining relative to its historical trend, an occurrence that makes this boom unique, at least for the postwar U.S. economy. We find that expensed plus sweat investment was large during this period and critical for understanding the movements in hours and productivity. Expensed investments are expenditures that increase future profits but, by national accounting rules, are treated as operating expenses rather than capital expenditures. Sweat investments are uncompensated hours in a business made with the expectation of realizing capital gains when the business goes public or is sold. Incorporating expensed and sweat equity into an otherwise standard business cycle model, we find that there was rapid technological progress during the 1990s, causing a boom in market hours and actual productivity.H |
| Keywords: | 1990 U.S. Hours Boom; Productivity |
| JEL: | E01 E32 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:192&r=dge |
| By: | Fang Yang (University of Minnesota University of Minnesota) |
| Abstract: | This paper studies a quantitative dynamic general equilibrium life-cycle model where parents and their children are linked by bequests, both voluntary and accidental, and by the transmission of earnings ability. This model is able to match very well the empirical observation that households with similar lifetime incomes hold very different amounts of wealth at retirement. Income heterogeneity and borrowing constraints are essential in generating the variation in retirement wealth among low lifetime income households, while the existence of intergenerational links is crucial in explaining the heterogeneity in retirement wealth among high lifetime income households |
| Keywords: | Wealth Inequality, Incomplete Markets |
| JEL: | E21 H31 H55 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:94&r=dge |
| By: | Caterina Mendicino (Department of Economics Stockholm School of Economics) |
| Abstract: | This paper investigate how the degree of credit market development is related to business cycle fluctuations in industrialized countries. I show that a business cycle model with collateral constraints generate a negative relation between the volatility of the cyclical component of output and the size of the credit market. I dentify the reallocation of capital as the key element in shaping out this relation. According to the model, more credit to the private sector makes output less sensitive to productivity shocks. Thus, the amplification role of credit frictions in the propagation of productivity shocks to output is greater in economies with higher degrees of credit rationing. I confront the prediction of the model with a panel of OECD countries over the last 20 years. Empirical evidence confirms that countries with a more developed credit market experience smoother fluctuations. Moreover, a greater size of the credit market dampens the propagation of productivity shocks to output and investment |
| Keywords: | collateral constraint, reallocation of capital, asset prices |
| JEL: | E21 E22 E44 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:317&r=dge |
| By: | Francois Gourio |
| Abstract: | In this paper, I propose and test a simple technology-based theory of firms' sensitivities to aggregate shocks. I show that when the elasticity of substitution between capital and labor is below unity, low profitability firms are more sensitive to aggregate shocks, i.e. to the business cycle. Since the wage is smoother than productivity, revenues are more procyclical than costs, making profits, the residual procyclical. Firms with low profitability are more procyclical since the residual is smaller and the amplification greater. I study the asset pricing implications of this technology and find that it can explain the riskiness of small and “value†firms (Fama and French 1996). These firms are less profitable and are thus more procyclical. I find empirically that the cross-section of expected returns is well explained by differences in sensitivities of firms’ earnings to GDP growth, or by differences in profitability. The model yields rich empirical implications by linking a firm’s real behavior (the elasticity of output, employment and profits to an aggregate shock) to its financial characteristics (the firm's betas and its average return). I next embed my partial equilibrium model in a full DSGE model to conduct a GE analysis. Empirically I show that firms with low margins are indeed more sensitive to the business cycle in their employment, sales or profits |
| Keywords: | Cross-section of returns, book-to-market, value premium, productivity heterogeneity |
| JEL: | E44 G12 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:846&r=dge |
| By: | Matteo Iacoviello (Economics Boston College) |
| Abstract: | I construct a heterogeneous agents economy that mimics the time-series behavior of the US earnings distribution from 1963 to 2003. Agents face aggregate and idiosyncratic shocks and accumulate real and financial assets. I estimate the shocks driving the model using data on income inequality, on aggregate income and on measures of financial liberalization. I show how the model economy can replicate two empirical facts: the trend and cyclical behavior of household debt, and the diverging patterns in consumption and wealth inequality over time. In particular, I show that, while short-run changes in household debt can be accounted for by aggregate fluctuations, the rise in household debt of the 1980s and the 1990s can be quantitatively explained only by the concurrent increase in income inequality |
| Keywords: | Household Debt, Income Inequality, Incomplete Markets, Borrowing Constraints |
| JEL: | E31 E32 E44 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:585&r=dge |
| By: | Ben Malin (Economics Stanford University) |
| Abstract: | Although it is well known that aggregate variables have slow-moving stochastic components, research on macroeconomic fluctuations has focused primarily on high-frequency movements of the data. I document some interesting lower-frequency facts in U.S. postwar data and investigate whether dynamic stochastic general equilibrium (DSGE) models can explain these facts. One fact of particular interest is that hours worked per capita is negatively correlated with both output per capita and total factor productivity at lower frequencies, in stark contrast to the positive comovement of these three variables at high frequencies. I show that this lower-frequency fact is puzzling for many DSGE models and explore a variety of candidate solutions to the puzzle. I demonstrate that preferences which depend on a time-varying reference level of consumption ("living standards") can rationalize the observed patterns. Finally, I discuss the relative merits of the "living standards" interpretation of the model to other alternatives |
| Keywords: | Aggregate Fluctuations, Lower Frequency, Labor Hours |
| JEL: | E32 E10 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:752&r=dge |
| By: | Melvyn Coles; Adrian Masters (State University of New York Albany) |
| Abstract: | In the context of a standard equilibrium matching framework, this paper considers how a duration dependent unemployment insurance (UI) system affects the dynamics of unemployment and wages in an economy subject to stochastic job-destruction shocks. It establishes that re-entitlement effects induced by a finite duration UI program generate intertemporal transfers from firms that hire in future booms to firms that hire in current recessions. These transfers imply a net hiring subsidy in recessions which stabilizes unemployment levels over the cycle |
| Keywords: | Matching frictions, Unemployment, Duration Dependent UI. |
| JEL: | J63 J64 J65 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:189&r=dge |
| By: | Daron Acemoglu; Veronica Guerrieri (MIT) |
| Abstract: | This paper constructs a model of non-balanced economic growth. The main economic force is the combination of differences in factor proportions and capital deepening. Capital deepening tends to increase the relative output of the sector with a greater capital share (despite the equilibrium reallocation of capital and labor away from that sector). We first illustrate this force using a general two-sector model. We then investigate it further using a class of models with constant elasticity of substitution between two sectors and Cobb- Douglas production functions in each sector. In this class of models, non-balanced growth is shown to be consistent with an asymptotic equilibrium with constant interest rate and capital share in national income. Finally, we construct and analyze a model of “nonbalanced endogenous growth,†which extends these results to an economy with endogenous and directed technical change, and demonstrates that non-balanced technological progress can be an equilibrium phenomenon |
| Keywords: | capital deepening, endogenous growth, multi-sector growth, non-balanced |
| JEL: | O40 O41 O30 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:207&r=dge |
| By: | Shouyong Shi (University of Toronto public) |
| Abstract: | In this paper I examine whether a society can improve welfare by imposing a legal restriction to forbid the use of nominal bonds as a means of payments for goods. To do so, I integrate a microfounded model of money with the framework of limited participation. While the asset market is Walrasian, the goods market is decentralized and the legal restriction is imposed only in a fraction of the trades. I show that the legal restriction can improve the society's welfare. This essential role of the legal restriction persists even in the steady state, in contrast to the one-period role established in the literature. Also in contrast to the literature, the essential role of the legal restriction does not rely on households' ability to trade unmatured bonds for money after observing the taste (or endowment) shocks. Thus, the role cannot be mimicked or replaced with other policies such as discount windows |
| Keywords: | Nominal bonds, search, money, efficiency |
| JEL: | E40 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:245&r=dge |
| By: | Francisco Covas; Wouter Denhaan (Economics Subject Area London School of Economics) |
| Abstract: | Net equity issuance occurs frequently and is quantitatively important for both small and large publicly traded firms. Moreover, we show that net equity and net debt issuance are positively correlated and both are procyclical for small firms. For large firms net equity issuance is neither cyclical nor correlated with debt issuance. We extend the existing business cycle models with agency costs in two ways. First, we relax the standard assumptions of linearity and full depreciation. Consequently, variables such as the default probability and leverage will depend on firm size. It also means that an increase in net worth reduces the default probability (instead of leaving it unchanged). Second, we relax the standard assumption that firms cannot attract outside equity. In our model, aggregate shocks are propagated as in the model without equity issuance, but in contrast to the standard model they are also magnified and the default rate is countercyclical. Moreover, our model is consistent with the observed cyclical behavior of firms' financing sources for both small and large firms. |
| Keywords: | agency costs, frictions |
| JEL: | E32 E44 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:407&r=dge |
| By: | Fatih Guvenen; Burhanettin Kuruscu (Economics University of Texas at Austin) |
| Abstract: | This paper introduces a tractable general equilibrium overlapping-generations model of human capital accumulation, and shows that it provides a consistent explanation of several key features of the evolution of the U.S. wage distribution from 1970 to 2000. The framework is based on the Ben-Porath (1967) model. The key feature of the model, and the only source of heterogeneity, is that individuals differ in their ability to accumulate human capital. To highlight the working of the model, we abstract from all kinds of idiosyncratic uncertainty that has been the focus of recent research. Thus, wage inequality only results from differences in human capital accumulation. The main thought experiment is the following. We calibrate the model to be consistent with the features of the wage distribution in 1970, and then consider the effect of skill-biased technical change, modeled as an increase in the returns to human capital after 1970. The model is both qualitatively and quantitatively consistent with: (i) a large increase in wage inequality but a much smaller rise in consumption inequality, which happens at the aggregate level as well as within each cohort (Krueger and Perri 2004; Blundell and Preston, 1998), (ii) a falling college-high school premium in the 70's followed by a strong rise starting in early 80's (Katz and Murphy 1992), (iii) stagnating median wages (and a slow-down in labor productivity) from mid-70's until mid-90's, (iv) the fact that the wage growth of a worker between 1965 and 1990 was almost linearly related to his position in the wage percentile distribution in 1965 (Juhn, Murphy and Pierce 1993), (v) the evolution of the 90-50 and 50-10 percentile differentials. We also show theoretically that several of these results are robust features of this model, as long as the heterogeneity in ability is sufficiently large. |
| Keywords: | Wage and Consumption Inequality, Wage Structure, Skill-Biased Technical Change |
| JEL: | J24 J31 O47 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:881&r=dge |
| By: | Bart Hobijn; Aysegul Sahin (Research and Statistics Group Federal Reserve Bank of New York) |
| Abstract: | We introduce a joint model of labor market search and firm size dynamics to explain the differential in labor market and productivity outcomes between the U.S. and the European Union. At the core, our model is a hybrid of the labor market search model by Mortensen and Pissarides (1994) and the model of the size distribution firms by Lucas (1978). Around this core, however, we add several layers that we use to add rigidities that affect the `flexibility' with which resources are allocated in our model economy. The first layer that we add is creative destruction. That is, we relate the need for job reallocations to the growth rate of the economy. In each period better firms enter while inferior firms exit, in the spirit of Jovanovic (1982). Hence, contrary to Mortensen and Pissarides (1994), exit of firms, and the destruction of the jobs that they offer, is thus endogenous in our model. The second layer that we add is the occupational choice of workers that are without a job. That is, in equilibrium workers endogenously decide whether to look for a job or to become an entrepreneur based on the quality of a business idea that they have. The third layer is the dynamic hiring and firing decisions of firms. Similar to Hopenhayn and Rogerson (1993), the firm dynamics in our model economy are in large part driven by the dynamic hiring and firing decisions made by the existing firms. We use this model to identify which types of rigidities have the biggest distortionary effect on the allocation of resources both in terms of labor as well as in terms of productivity |
| Keywords: | Search, Firm Size Dynamics, Productivity |
| JEL: | L11 D24 J64 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:737&r=dge |
| By: | Filippo Occhino |
| Abstract: | How should taxes, government expenditures, the primary and fiscal surpluses and government liabilities be set over the business cycle? We assume that the government chooses expenditures and taxes to maximize the utility of a representative household, utility is increasing in government expenditures, only distortionary labor income taxes are available, and the cycle is driven by exogenous technology shocks. We first consider the commitment case, and characterize the Ramsey equilibrium. In the case that the utility function is constant elasticity of substitution between private and public consumption and separable between the composite consumption good and leisure, taxes, government expenditures and the primary surplus should all be constant positive fractions of production, and both government liabilities and the fiscal surplus should be positively correlated with production. Then, we relax the commitment assumption, and we show how to determine numerically whether the Ramsey equilibrium can be sustained by the threat to revert to a Markov perfect equilibrium. We find that, for realistic values of the preferences discount factor, the Ramsey equilibrium is sustainable. |
| Keywords: | Fiscal policy, Commitment, Time-consistency, Ramsey equilibrium, Markov perfect equilibria, Sustainable equilibria. |
| JEL: | E62 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:608&r=dge |
| By: | Ricardo Lagos (Economics New York University); Guillaume Rocheteau |
| Abstract: | This paper investigates how the degree of trading frictions in asset markets affects portfolio allocations, asset prices, efficiency, and several measures of liquidity, such as execution delays, bid-ask spreads, and trade volumes. To this end, we generalize the search-theoretic model of financial intermediation of Duffie, Garleanu and Pedersen (2005) to allow for more general preferences and idiosyncratic shock structure, unrestricted portfolio choices, aggregate uncertainty, and entry of financial intermediaries (dealers). Investors are subject to shocks that periodically change their desired asset holdings, and contact dealers to rebalance their portfolios. Investors and dealers are matched bilaterally according to a stochastic, time-consuming process, and the latter have instantaneous access to a competitive (inter-dealer) market for the asset. We study the model with a fixed measure of dealers and show that a steady-state equilibrium exists and is unique. We provide a simple condition on preferences under which a reduction in trading frictions (e.g., a reduction in execution delays) will lead to an increase in the price of the asset. We also study the connection between the volatility of asset prices and the degree of trading frictions. From a normative standpoint, we find that the asset allocation is constrained-inefficient unless investors have all the bargaining power in bilateral negotiations with dealers. We also analyze the model with entry of dealers, thereby endogenizing the extent of the trading frictions. We show that the dealers' entry decision introduces a feedback that can give rise to multiple equilibria, and construct examples. With entry, we find that both the portfolio allocation across investors and the number of dealers are socially inefficient |
| Keywords: | Search, asset markets |
| JEL: | G11 G12 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:869&r=dge |
| By: | Jeremy Lise |
| Abstract: | In this paper, I develop and estimate a model of the labor market that can account for both the inequality in earnings and the much larger inequality in wealth observed in the data. I show that an equilibrium model of on-the-job search, augmented to account for saving decisions of workers, provides a direct and intuitive link between the empirical earnings and wealth distributions. The mechanism that generates the high degree of wealth inequality in the model is the dynamic of the ``wage ladder'' resulting from the search process. There is an important asymmetry between the incremental wage increases generated by on-the-job search (climbing the ladder) and the drop in income associated with job loss (falling off the ladder). This feature of the model generates differential savings behavior at different points in the earnings distribution. The wage growth expected by low wage workers, combined with the fact that their earnings are not much higher than unemployment benefits, causes them to dis-save. As a worker's wage increases, the incentive to save increases: the potential for wage growth declines and it becomes increasingly important to insure against the large income reduction associated with job loss. The fact that high wage and low wage workers have such different savings behavior generates an equilibrium wealth distribution that is much more unequal than the equilibrium wage distribution. I estimate the structural parameters of the model by simulation-based methods using the 1979 youth cohort of the NLSY. The estimates indicate that the micro-level search and savings behavior---estimated from the dynamics of individuals' labor market histories and wealth accumulation decisions---aggregates to replicate the cross-sectional inequality in earnings and wealth for this cohort. |
| Keywords: | labor search, savings, consumption, wealth inequality |
| JEL: | J64 E21 E24 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:137&r=dge |
| By: | Allen Head (Department of Economics Queen's University); Beverly Lapham |
| Abstract: | The short-run non-neutrality of money and its implications for inflation dynamics are examined in a monetary search economy with heterogeneous agents. Lump-sum money injections affect the distribution of money holdings in equilibrium and thus generate short-run non-neutrality. The response of prices and inflation to shocks of this type depends on the changes in households' search intensity that they induce. Monetary shocks change the distribution of prices in equilibrium and thus alter the returns to search. The resulting changes in optimal search intensity affect sellers' profit maximizing markups and thus may result in sluggish price adjustment and persistent inflation despite the absence of restrictions of sellers; ability to set prices in every period |
| Keywords: | Price Dispersion, Inflation, Mark-ups, Dynamics |
| JEL: | E31 D43 E41 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:559&r=dge |
| By: | Henry Siu (Department of Economics University of British Columbia); Nir Jaimovich |
| Abstract: | In this paper we investigate the consequences of demographic change for business cycle analysis. We find that changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the US and other G7 economies. During the postwar period, these countries have experienced dramatic demographic change, though details regarding extent and timing differ from place to place. Using panel data methods, we exploit this variation to show that the age composition of the workforce has a large and statistically significant effect on cyclical volatility. We conclude by relating these findings to the recent decline in US business cycle volatility. Through simple quantitative accounting exercises, we find that demographic change accounts for a significant part of this moderation |
| Keywords: | business cycles |
| JEL: | E20 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:815&r=dge |
| By: | Keiichiro Kobayashi (Research division RIETI); Masaru Inaba |
| Abstract: | We conducted business cycle accounting (BCA) using the method developed by Chari, Kehoe, and McGrattan (2002a) on data from the 1980s--1990s in Japan and from the interwar period in Japan and the United States. The contribution of this paper is twofold. First, we find that labor wedges may have been a major contributor to the decade-long recession in the 1990s in Japan. We argue that the deterioration of the labor wedge may have been caused by sticky wages and monetary contraction, and it may have been prolonged by the continuation of asset-price declines through binding collateral constraints. Second, we performed an alternative BCA exercise using the capital wedge instead of the investment wedge to check the robustness of BCA implications for financial frictions. The accounting results with the capital wedge imply that financial frictions may have had a large depressive effect during the 1930s in the United States. This implication is the opposite of that from the original BCA findings. |
| Keywords: | Business cycle accounting; Japanese economy; capital wedge; Great Depression. |
| JEL: | E32 E37 O47 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:313&r=dge |
| By: | Bjoern Bruegemann (Yale University); Giuseppe Moscarini |
| Abstract: | Shimer (2005) showed that a standard search and matching model of the labor market fails to generate fluctuations of unemployment and vacancies of the magnitude observed in US data in response to shocks to average labor productivity of plausible magnitude. He also suggested that wage determination through Nash bargaining may be the culprit. In this paper we pursue two objectives. First, we identify those properties of Nash bargaining that limit the ability of the model to generate a large response of unemployment and vacancies to a shock to average labor productivity. In light of these properties, cast in terms of a general model of wage determination, we reinterpret some of the specific solutions proposed so far to this problem. Second, we examine whether asymmetric information may help to violate those properties and to provide amplification. We assume that the firm has private information about the job's productivity, the worker about the amenity of the job, and aggregate labor productivity shocks do not change the distribution of private information around their mean. In this environment, we consider the monopoly (or monopsony) solution, namely a take-it-or-leave-it offer, and the constrained efficient allocation. We find that our key properties are satisfied for the first model essentially under all circumstances. They frequently (for commonly used specific distributions of beliefs) also apply to the constrained efficient allocation |
| Keywords: | Unemployment, Vacancies, Business Cycle, Asymmetric Information |
| JEL: | E24 J41 J63 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:215&r=dge |
| By: | Murat Tasci |
| Abstract: | This paper studies amplification of productivity shocks in labor markets through on-the-job-search. There is incomplete information about the quality of the employee-firm match which provides persistence in employment relationships and the rationale for on-the-job search. Amplification arises because productivity changes not only affect firms' probability of contacting unemployed workers but also of contacting already employed workers. Since higher productivity raises the value of all matches, even low quality matches become productive enough to survive in expansions. Therefore the measure of workers in low quality matches is greater when productivity is high, implying a higher probability of switching to another match. In other words, firms are more likely to meet employed workers in expansions and those they meet are more likely to accept firm's job offer because they are more likely to be employed in a low quality match. This introduces strongly procyclical labor market reallocation through procyclical job-to-job transitions. Simulations with a productivity process that is consistent with average labor productivity in the U.S. show that standard deviations for unemployment, vacancies and market tightness (vacancy-unemployment ratio) match the U.S. data. The model also reconciles the presence of endogenous separation with the negative correlation of unemployment and vacancies over business cycle frequencies (i.e. it is consistent with the Beveridge curve) |
| Keywords: | On-the-Job Search; Amplification; Business Cycles; Job-to-Job Flows |
| JEL: | E24 E32 J41 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:333&r=dge |
| By: | Emilio Espino |
| Abstract: | This paper studies equilibrium portfolios in the standard neoclassical growth model under uncertainty with heterogeneous agents and dynamically complete markets. Preferences are purposely restricted to be quasi-homothetic. The main source of heterogeneity across agents is due to different endowments of shares of the representative firm at date 0. Fixing portfolios is the optimal strategy in stationary endowment economies with dynamically complete markets. Whenever an environment displays changing degrees of heterogeneity across agents, the trading strategy of fixed portfolios cannot be optimal in equilibrium. Very importantly, our framework can generate changing heterogeneity if and only if either minimum consumption requirements are not zero or labor income is not zero and the value of human and non-human wealth are linearly independent |
| Keywords: | Neoclassical Growth Model, Equilibrium Portfolios, Complete Markets |
| JEL: | C61 D50 D90 E20 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:92&r=dge |
| By: | Garey Ramey (UC San Diego); Shigeru Fujita (Federal Reserve Bank of Philadelphia) |
| Abstract: | In the U.S. labor maarket, the vacancy-unemployment ratio and unemployment react sluggishly to productivity shocks. We show that the job matching model in its standard form cannot reproduce these patterns due to excessively rapid vacancy responses. Extending the model to incorprate sunk costs for vacancy creation yields highly realistic dynamics. Creation costs induce entrant firms to smooth the adjustment of new openings following a shock, leading the stock of vacancies to react sluggishly. |
| Keywords: | unemployment, vacancies, labor adjustment, matching, |
| Date: | 2006–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsdec:2005-08r&r=dge |
| By: | Ricardo J. Caballero; Emmanuel Farhi (Economics Massachusetts Institute of Technology); Pierre-Olivier Gourinchas |
| Abstract: | Three of the most important recent facts in global macroeconomics — the sustained rise in the US current account deficit, the stubborn decline in long run real rates, and the rise in the share of US assets in global portfolio — appear as anomalies from the perspective of conventional wisdom and models. Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) heterogeneity in these regions’ capacity to generate financial assets from real investments. In extensions of the basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with the recent trends in these variables. Unlike the conventional wisdom, in the absence of a large change in(a) or (b), our model does not augur any catastrophic event. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment |
| Keywords: | Current account deficits, capital flows, interest rates, global portfolios and equilibrium, growth and financial development asymmetries, exchange rates, FDI, intermediation rents. |
| JEL: | E0 F3 F4 G1 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:894&r=dge |
| By: | Alok Kumar (Economics University of Victoria) |
| Abstract: | This paper analyzes the general equilibrium effects of capital tax when there is a mandated minimum wage. The analysis is conducted in an inter-temporal search model in which firms post wages as in Burdett and Mortensen (1998). A(binding) minimum wage provides alower support for the distribution of wages. A decrease in capital tax leads to an increase in wage dispersion. In contrast, when the minimum wage is not binding, a lower capital tax reduces the dispersion in wages. A binding minimum wage also magnifies the positive effects of a lower capital tax on labor supply, employment, and output. The analysis suggests that a policy change which involves an increase in minimum wage and a fall in capital tax such that unemployment rate remains constant reduces dispersion of wages |
| Keywords: | Labor market search, capital tax, minimum wage, labor supply, wage dispersion, wage posting, general equilibrium |
| JEL: | E2 E6 J3 J4 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:345&r=dge |
| By: | Dror Goldberg (Department of Economics Texas A&M University) |
| Abstract: | Monetary search models are difficult to analyze unless the distribution of money holdings is made degenerate. Popular techniques include using an infinitely large household (Shi 1997) and adding a centralized market with quasi-linear utility (Lagos and Wright 2005). Wallace (2002) suggests as an alternative to have two-member households who can somehow direct their search, thus creating a degenerate distribution in a different way. This idea is modelled here for the first time by modifying the partially directed search model of Goldberg (forthcoming). The Friedman rule is optimal, but the costs of deviating from it are different from the above mentioned models |
| Keywords: | directed search, Friedman rule |
| JEL: | E31 E40 E50 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:618&r=dge |
| By: | Michele Boldrin; Larry E. Jones; Alice Schoonbroodt (Economics University of Minnesota) |
| Abstract: | After the fall in fertility during the Demographic Transition, many developed countries experienced a baby bust, followed by the Baby Boom and subsequently a return to low fertility. Received wisdom from the Demography literature links these large fluctuations in fertility to the series of Economics 'shocks' that occurred with similar timing -- the Great Depression, WWII, the economic expansion that followed and then the productivity slow down of the 1970's. To economists, this line of argument suggests a more general link between fluctuations in output and fertility decisions, of which the Baby-Bust-Boom-Bust event (BBB) is a particularly stark example. This paper is an attempt to formalize the conventional wisdom in simple versions of stochastic growth models with endogenous fertility. First, we develop initial tools to address the effects of ''temporary'' shocks to productivity on fertility choices. Second, we analyze calibrated versions of these models. We can then answer several qualitative and quantitative questions: Under what conditions is fertility pro- or countercyclical? How large are these effects and how is this related to the 'persistence' of the shocks? How much of the BBB can be accounted for by the kinds of medium run productivity fluctuations described as computed from the data? Preliminary results show that under reasonable parameter values fertility is procyclical, that the elasticity of fertility to shocks lays between 1 and 1.7 and, finally, that in our models, productivity shocks capture between 1/3 and 2/3 of the US baby bust and between ¼ and ½ of the US baby boom |
| Keywords: | fertility, productivity shocks, baby bust and boom |
| JEL: | J1 O4 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:689&r=dge |
| By: | Éva Nagypál (Economics Northwestern University) |
| Abstract: | The rate of job-to-job transitions is twice as large today as the rate at which workers move from employment to unemployment. I demonstrate that, under plausible specifications, the basic job-ladder model --- the workhorse model of the literature on on-the-job search --- has no chance of matching the extent of job-to-job transitions. Moreover, it cannot account for the low search effort exerted by most employed workers and the observation that on-the-job search is a means to ``escape'' unemployment: it is undertaken exactly by those workers who are facing the threat of becoming unemployed. I develop an alternative theoretical framework that can quantitatively match salient features of job-to-job transitions. The model incorporates a stochastic process that causes the value of a job to the worker to decrease at times, predicting that workers with a lower job value have a higher probability of entering unemployment. This natural feature is not in standard models. A second important element of the model is endogenous search effort, explaining the low search effort exerted by many employed workers and the correlation between search effort and the probability of becoming unemployed observed in the data. Calculating the equilibrium of the model shows that it can successfully account for the stylized facts on job-to-job transitions. I also demonstrate that the model can account for observed differences in the extent of job-to-job transitions across demographic groups |
| Keywords: | On-the-job search, labor-market transitions |
| JEL: | J60 J63 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:10&r=dge |
| By: | Ivan Jaccard |
| Abstract: | The main contribution of this work is to provide a dynamic general equilibrium model of asset allocation, allowing to reconcile economic theory with several puzzling contradictions recently pointed out in the literature: (i) the asset allocation puzzle, (ii) the observed time-variation in aggregate portfolio holdings, and (iii) the occurrence of twin peaks in equity and house prices. In this approach, compared to the existing literature, the main difference stems from the fact that, in addition to consumption and dividends, both prices and portfolio decisions are allowed to be endogenously determined within a general equilibrium framework. Secondly, real estate is introduced into the analysis, labor supply is allowed to be endogenously determined and macroeconomic shocks are the main source of riskiness. |
| Keywords: | strategic asset allocation, real estate, house prices, business cycle, general equilibrium |
| JEL: | E20 G11 G12 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:574&r=dge |
| By: | Damien Gaumont; Martin Schindler (IMF); Randall Wright |
| Abstract: | Search models with posting and match-specific heterogeneity generate wage dispersion. Given K values for the match-specific variable, it is known that there are K reservation wages that could be posted, but generically never more than two actually are posted in equilibrium. What is unknown is when we get two wages, and which wages are actually posted. For an example with K = 3, we show equilibrium is unique; may have one wage or two; and when there are two, the equilibrium can display any combination of posted reservation wages, depending on parameters. We also show how wages, profits, and unemployment depend on productivity |
| Keywords: | Search equilibrium, wage posting, wage dispersion, labor theory |
| JEL: | D83 E24 J31 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:147&r=dge |
| By: | Benoit Julien (Economics Australian Graduate School of Management); John Kennes; Ian King |
| Abstract: | This paper analyzes monetary exchange in a search model allowing for multilateral matches to be formed, according to a standard urn-ball process. We consider three physical environments: indivisible goods and money, divisible goods and indivisible money, and divisible goods and money. We compare the results with Kiyotaki and Wright (1993), Trejos and Wright (1995), and Lagos and Wright (2005) respectively. We …nd that the multilateral matching setting generates very simple and intuitive equilibrium allocations that are similar to those in the other papers, but which have important di¤erences. In particular, sur- plus maximization can be achieved in this setting, in equilibrium, with a positive money supply. Moreover, with ‡exible prices and directed search, the …rst best allocation can be attained through price posting or through auctions with lotteries, but not through auctions without lotteries. Finally, analysis of the case of divisible goods and money can be performed without the assumption of large families (as in Shi (1997)) or the day and night structure of Lagos and Wright (2005) |
| Keywords: | Matching, Money, Directed Search |
| JEL: | C78 D44 E40 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:883&r=dge |
| By: | Yann Algan; Edouard Challe; Xavier Ragot |
| Abstract: | This paper analyses the short-run effect of inflation shocks in an economy with incomplete markets, idiosyncratic unemployment risk, and fully flexible prices. Inflation shocks redistribute wealth from the cash-rich employed to the cash-poor unemployed, thereby forcing the former to work more in order to maintain their desired levels of consumption and precautionary savings. The reduced-form dynamics of the model is a textbook "output-inflation trade-off" equation where inflation shocks raise output contemporaneously, the effect being stronger the higher is idiosyncratic unemployment risk. We find that the data provides support for this short-run non-neutrality mechanism based on incomplete markets. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2006-45&r=dge |
| By: | Julien Prat (Economics Vienna University) |
| Abstract: | We construct and estimate by maximum likelihood an equilibrium search model where wages are set by Nash bargaining and idiosyncratic productivity follows a geometric Brownian motion. The proposed framework enables us to endogenize job destruction and to estimate the rate of learning-by-doing. Although the range of the observations is not independent of the parameters, we establish that the estimators satisfy asymptotic normality. The structural model is estimated using Current Population Survey data on accepted wages and employment durations. We show that it captures almost perfectly the evolution through tenure of the crosssectional distribution of wages. We find that the returns to tenure are slightly higher for workers without tertiary education than for tertiary educated workers |
| Keywords: | Job Search, Uncertainty, Structural Estimation |
| JEL: | J31 J64 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:647&r=dge |
| By: | Giulio Fella (Economics Queen Mary, University of London); Giovanni Gallipoli |
| Abstract: | This paper provides a framework within which to study the equilibrium impact of alternative policies. We develop an overlapping generation, life-cycle model with endogenous education and crime choices. Education and crime depend on different dimensions of heterogeneity, which takes the form of differences in innate ability and wealth at birth as well as employment shocks. The model is calibrated to match education enrolments, aggregate (property) crime rate and some features of the wealth distribution. In our numerical experiments we find that policies targeting crime reduction through increases in high school graduation rates are more cost-effective than simple incapacitation policies. The cost-effectiveness of high school subsidies increases significantly if they are targeted at the wealth poor. Financial incentives to high school graduation have radically different implications in general and partial equilibrium |
| Keywords: | Crime, Education, Life Cycle |
| JEL: | E26 H52 I28 K42 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:136&r=dge |
| By: | Merwan H. Engineer (University of Victoria); Ming Kang; Eric Roth; Linda Welling |
| Abstract: | This paper makes five contributions to the modeling of societies organized primarily according to age. First, it models the social rules adhered to by a particular age-group society, the Rendille of Northern Kenya. Second, it shows that their age-group rules are well represented by the standard overlapping generations (OLG) model. Third, we develop a genealogical OLG model that closely captures lifecycle transitions and lineages. Fourth, despite heterogeneity in the timing of marriage and birthing, the model can be calibrated using aggregate data. Fifth, the model permits an analysis of institutions that reveals the intergenerational conflicts between the lineages in changing the social rules |
| Keywords: | Overlapping Generations Model, Age-Group Societies, Institutions, Political Economy |
| JEL: | J1 J12 O1 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:248&r=dge |
| By: | Yili Chien; Junsang Lee (UCLA public) |
| Abstract: | We study optimal capital taxation in a limited commitment environment. Our environment consists of a continuum of households with idiosyncratic labor shocks, who have access to a complete contingent claims market. Financial contracts are not perfectly enforceable; as in Kehoe and Levine (1993), enforcement constraints take the form of endogenous debt limits. This market imperfection drives the endogenous discrepancy between the household and planner discount factors: households face the possibility of being debt constrained in the future, and as a result have a higher discount factor than the planner, who does not face such a constraint. In such an economy, the planner will choose an optimal capital level that is lower than that chosen by households; this di¤erence in the choice of capital motivates imposing a positive capital income tax on households to induce them to invest at the socially optimal amount |
| Keywords: | Capital Tax, borrowing constraint, enforcement |
| JEL: | E22 E62 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:492&r=dge |
| By: | Martin D D Evans; Viktoria Hnatkovska (Economics Georgetown University) |
| Abstract: | International capital flows have increased dramatically since the 1980s, with much of the increase being due to trade in equity and debt markets. Such developments are often attributed to the increased integration of world financial markets. We present a model that allows us to examine how greater integration in world financial markets affects the behavior of international capital flows and financial returns. Our model predicts that international capital flows are large (in absolute value) and very volatile during the early stages of financial integration when international asset trading is concentrated in bonds. As integration progresses and households gain access to world equity markets, the size and volatility of international bond flows fall dramatically but continue to exceed the size and volatility of international equity flows. This is the natural outcome of greater risk sharing facilitated by increased integration. We find that the equilibrium flows in bonds and stocks are larger than their empirical counterparts, and are largely driven by variations in equity risk premia. The paper also makes a methodological contribution to the literature on dynamic general equilibrium asset-pricing. We implement a new technique for solving a dynamic general equilibrium model with production, portfolio choice and incomplete markets |
| Keywords: | Globalization; Portfolio Choice; Financial Integration; Incomplete Markets; Asset Prices. |
| JEL: | D52 F36 G11 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:60&r=dge |
| By: | Ricardo Cavalcanti; Andres Erosa |
| Abstract: | We show that price stickiness is predicted by the theory of second best, applied to a random- matching model of money. The economy is hit with iid, aggregate, preference shocks, and allocations are allowed to be history dependent. Due to individual anonymity and lack of commitment, implementable allocations must satisfy participation constraints. Price stickiness becomes necessary for optimality, in terms of average, ex-ante welfare, when aggregate uncen- tainty is present but not too severe, and the degree of patience is neither too low or too high. By applying mechanism design to an alternative economy with centralized markets, we also Þnd important that macroeconomic policies, such as the taxation of money holdings, are unable to implement the Þrst best for price stckiness to have a social role |
| Keywords: | Mechanism Design, monetary theory, history dependence |
| JEL: | E10 E50 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:738&r=dge |
| By: | Trine Filges; John Kennes (Institute of Economics University of Copenhagen); Torban Tranaes |
| Abstract: | We find that the main featues of labor policy across OECD countries can be explained by an equilibrium search model with risk neutral agents and a government that chooses policy to maximize a social welfare function. Optimal policy redistributes income from advantaged to disadvantaged workers. A worker can be disadvantaged in one of two possible ways - they may have less ability to aquire and utilize skills in the workplace or they may have less ability to enjoy leaisure (i.e. home production). The government does not directly observe these attributes, but must infer them from labor market outcomes. The optimal policy is a solution to an incentive compatibility problem, because each worker has some influence over their labor market state. The model explains why passive benefits tend to fall and active benefits tend to increase durng the course of unemployment spell. The model also explains why countries that appear to pursue equity spend more on both active and passive labor market programs. |
| Keywords: | competitive search, optimal policy |
| JEL: | J41 J68 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:562&r=dge |
| By: | Christopher Erceg; Luca Guerrieri (International Finance Division Federal Reserve Board); Christopher Gust |
| Abstract: | A striking feature of U.S. trade is that both imports and exports are heavily concentrated in capital goods and consumer durables. However, most open economy general equilibrium models ignore the marked divergence between the composition of trade flows and the sectoral composition of U.S. expenditure, and simply posit import and exports as depending on an aggregate measure of real activity (such as domestic absorption). In this paper, we use a SDGE model (SIGMA) to show that taking account of the expenditure composition of U.S. trade in an empirically-realistic way yields implications for the responses of trade to shocks that are markedly different from those of a "standard" framework that abstracts from such compositional differences. Overall, our analysis suggests that investment shocks, originating from either foreign or domestic sources, may serve as an important catalyst for trade adjustment, while implying a minimal depreciation of the real exchange rate. Moreover, while policy changes that boost investment abroad could serve to significantly improve the U.S. trade balance through an export channel, reforms oriented at stimulating foreign consumption would exert less of a corrective force on the trade balance, and primarily work by restraining real U.S. imports |
| Keywords: | Trade, SDGE Model, Open Economy Macroeconomics |
| JEL: | F17 F41 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:788&r=dge |
| By: | Enrique G. Mendoza (University of Maryland); P. Marcelo Oviedo |
| Abstract: | Governments in emerging markets often behave like a "tormented insurer", trying to use non-state-contingent debt instruments to avoid sharp adjustments in their payments to private agents despite sharp fluctuations in public revenues. In the data, their ability to sustain debt is inversely related to the variability of their revenues, and their primary balances and current expenditures follow a procyclical pattern that contrasts sharply with the evidence from industrial countries. This paper proposes an equilibrium model of a small open economy with incomplete markets and aggregate uncertainty that can rationalize this behavior. In the model, a fiscal authority that chooses optimal expenditure and debt plans given stochastic revenues interacts with private agents that also make optimal consumption and asset accumulation plans. The competitive equilibrium of this economy is solved numerically as a Markov perfect equilibrium using parameter values calibrated to Mexican data. If perfect domestic risk pooling were possible, the ratio of public-to-private expenditures would be constant. With incomplete markets, however, this ratio fluctuates widely and results in welfare losses that dwarf previous estimates of the benefits of risk sharing and consumption smoothing. The model also yields a negative relationship between average public debt and revenue variability similar to the one observed in the data, and a correlation between output and government purchases that matches Mexican data |
| Keywords: | optimal debt, fiscal solvency, procyclical fiscal policy, incomplete markets |
| JEL: | E62 F34 H63 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:377&r=dge |
| By: | Yann Algan; Olivier Allais; Wouter J. Den Haan |
| Abstract: | A new algorithm is developed to solve models with heterogeneous agents and aggregate uncertainty that avoids some disadvantages of the prevailing algorithm that strongly relies on simulation techniques and is easier to implement than existing algorithms. A key aspect of the algorithm is a new procedure that parameterizes the cross-sectional distribution, which makes it possible to avoid Monte Carlo integration. The paper also develops a new simulation procedure that not only avoids cross-sectional sampling variation but is also more than ten times faster than the standard procedure of simulating an economy with a large but finite number of agents. This procedure can help to improve the efficiency of the most popular algorithm in which simulation procedures play a key role. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2006-46&r=dge |
| By: | Jess Benhabib; Alberto Bisin (Department of Economics New York University) |
| Abstract: | In this paper we study theoretically the dynamics of the distribution of wealth in an Overlapping Generation economy with bequest and various forms of redistributive taxation. We characterize the transitional dynamics of the wealth distribution and as well as the stationary distribution. We show that, in our economy, the stationary wealth distribution is a power law, a Pareto distribution in particular. Wealth is less concentrated (the Gini coefficient is lower) for both higher capital income taxes and estate taxes, but the marginal effect of capital income taxes is much stronger than the effect of estate taxes. Finally, we characterize optimal redistributive taxes with respect to an utilitarian social welfare measure. Social welfare is maximized short of minimal wealth inequality and with zero estate taxes. |
| Keywords: | wealth distribution |
| JEL: | E6 C6 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:368&r=dge |
| By: | Arnaud Cheron; Jean-Olivier Hairault; Francois Langot |
| Abstract: | This paper originally incorporates life-cycle features into the job creation - job destruction framework. Once a finite horizon is introduced, this workhorse labor market model naturally delivers the empirically uncontroversial prediction that the employment rate of workers decreases with age due to lower hirings and higher firings of older workers. This age profile of hirings and firings is in addition found to be optimal in a competitive search equilibrium context. If search externalities are not internalized and unemployment benefits distort equilibrium, there is a room for labor market policy differentiated by age. This lastly allows us to debate the incidence of labor demand policies which have been introduced in many countries to favor the older worker employment. We show that hiring subsidies and firing costs should be decreasing with age when unemployment benefits are sufficiently high, as in the Europe. On the contrary, if unemployment benefits are low, as in the US, optimal hiring subsidies and firing taxes should be increasing with age. In this latter case, the introduction of anti-discrimination laws is a good proxy of this first best policy. |
| Keywords: | Job creations and destructions, Life cycle, Older workers |
| JEL: | J20 J63 J71 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:641&r=dge |
| By: | Kaiji Chen (Economics University of Oslo); Ayse Imrohoroglu; Selahattin Imrohoroglu |
| Abstract: | The U.S. national saving rate has been declining since the 1960s while the share of consumption in output has been increasing. We explore if a standard growth model can explain the secular movements observed in this time period. Our quantitative findings indicate that the standard neoclassical growth model is able to generate saving rates and consumption that are remarkably similar to the data during 1960-2004 |
| Keywords: | U.S. consumption, saving, TFP |
| JEL: | E21 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:154&r=dge |
| By: | Aleksander Berentzen (University of Basel); Cyril Monnet |
| Abstract: | This paper studies optimal interest-rate policies when the central bank operates a channel system of interest-rate control. We conduct our analysis in a dynamic general equilibrium model with infinitely-lived agents who are subject to idiosyncratic trading shocks which generate random liquidity needs. In response to these shocks agents either borrow against collateral or deposit money at the central bank at the specified rates. We show that it is optimal to have a strictly positive interest-rate corridor if the opportunity cost of holding collateral is strictly positive and that the optimal corridor is strictly decreasing in the collateral's real return |
| Keywords: | Optimal Monetary Policy, Channel System, Interest Rate Rule, Essential Money |
| JEL: | E4 E5 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:572&r=dge |
| By: | Juan Carlos Hatchondo; Leonardo Martinez; Horacio Sapriza |
| Abstract: | We study a standard quantitative model of sovereign default in which the government in a small open economy (SMO) decides how much to save and whether to default on its debt. In contrast with previous quantitative studies, we do not assume that a defaulting country is exogenously excluded from capital markets, and we assume that political parties with different discount factors alternate in power. Preliminary quantitative results indicate that even without assuming exogenous exclusion, after a default episode, the model generates difficulties in market access---in average, for the same level of debt, spreads are higher after default; due to this increase in borrowing costs, capital inflows are initially decreased, and recover slowly after that. We also describe the strategic interaction of governments with different patience |
| Keywords: | Sovereign Default, Strategic Behavior; Endogenous Borrowing Constraints; Markov Perfect Equilibrium. |
| JEL: | F34 F41 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:845&r=dge |
| By: | P. Marcelo Oviedo; Rajesh Singh (Economics Iowa State University) |
| Abstract: | Backus, Kehoe, and Kydland (International Real Business Cycles, JPE, 100(4),1992) documented several discrepancies between the observed post-war business cycles of developed countries and the predictions of a two-country, complete-market model. The main discrepancy termed as the “quantity anomaly†that cross-country consumption correlations are higher than that of output in the model as opposed to data, has remained a central puzzle in international economics. In order to resolve this puzzle mainly two strategies: restrictions on asset trade, and introducing non-traded goods in the model, have been employed by researchers. While these extensions have been successful in closing the gap to some extent, the ordering of correlations has stayed unchanged: consumption correlations still exceed that of output. This paper attempts to resolve the quantity puzzle by introducing non-traded distribution costs in the retailing of traded goods. In a standard two-good model traded output and traded consumption, by definition, are identical goods. With distribution costs, traded output and consumption are two distinct entities as each unit of final traded consumption good incorporates a unit of traded good and a fixed amount of non-traded goods. Thus, effectively, the model with distribution costs can be viewed as a model without distribution costs but with a modified utility function that has a substantially stronger complementarity between traded and non-traded goods. In a simple two-good extension of the Backus, Kehoe, and Kydland model, it is shown that the cross-country consumption and output correlations are 0.55 and 0.30, respectively, whereas with distribution costs consumption correlation reduces to 0.09, output correlation to 0.23. Incorporating distribution costs, in addition, improves the model’s performance in matching the volatility of real exchange rates and the correlation of net exports with output. These improvements are achieved without sacrificing the model's performance in any other dimension. |
| Keywords: | open economy business cycles; quantity puzzle; distribution costs |
| JEL: | F32 F34 F41 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:808&r=dge |
| By: | Dean Corbae (University of Texas); Borghan N. Narajabad |
| Abstract: | We apply a mechanism design approach to a trading post environment where the household type space (tastes over variety) is continuous and it is costly to set up shops that trade differentiated goods. In this framework, we address Hotelling's <cite>Hot</cite> venerable question about where shops will endogenously locate in variety space across environments with and without money. Money has a role in our environment due to anonymity. Our specific question is whether monetary exchange leads to more product variety than an environment without money (i.e. a barter economy). We show that an efficient monetary mechanism does in fact lead to more product variety available to households provided the discount factor is sufficiently high, costs of operating shops are sufficiently low, and there is sufficient heterogeneity in tastes and abilities. We then show how this allocation can be implemented in a trading post economy with money. The paper is an attempt to integrate monetary theory and industrial organization |
| Keywords: | Matching Models of Money, Trading Posts |
| JEL: | E4 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:778&r=dge |
| By: | Robert F. Martin (International Finance Federal Reserve Board) |
| Abstract: | This paper explores the baby boom's impact on U.S. house prices and interest rates in the post-war 20th century and beyond. Using a simple Lucas asset pricing model, I quantitatively account for the increase in real house prices, the path of real interest rates, and the timing of low-frequency fluctuations in real house prices. The model predicts that the primary force underlying the evolution of real house prices is the systematic and predictable changes in the working age population driven by the baby boom. The model is calibrated to U.S. data and tested on international data. One surprising success of the model is its ability to predict the boom and bust in Japanese real estate markets around 1974 and 1990. |
| Keywords: | asset pricing, yield curve, moderation |
| JEL: | E21 E31 G12 R21 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:84&r=dge |
| By: | Lars Ljungqvist (DEPT OF ECONOMICS STOCKHOLM SCHOOL OF ECONOMICS); Thomas J. Sargent |
| Abstract: | We first scrutinize and challenge Prescott's (2002, 2004) quantitative analysis of the role of differences in taxes in explaining cross-country differences in labor market outcomes, and then defend an alternative model that assigns an important role to cross-country differences in social unemployment insurance institutions that Prescott argues can be safely ignored. In the process, we explore how the assumption of indivisible labor interacts with assumptions regarding the (in)completeness of financial markets and any frictions in the labor market, to determine the labor supply elasticity. |
| Keywords: | Employment lotteries, indivisible labor, labor supply elasticity, taxation, unemployment, unemployment insurance |
| JEL: | E24 J64 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:734&r=dge |
| By: | Mariano M. Croce (economics nyu) |
| Abstract: | The main goal of this paper is to measure the welfare costs of business cycles in a production economy in which the representative agent has low risk aversion and - at the same time - the equity premium and the co-movements of aggregate quantities and market returns are comparable to what observed in historical data. In order to do so, I consider a production economy in which the representative agent has Epstein-Zin-Weil(1989) preferences, productivity has a Long Run Risk component and there are capital adjustment costs. In this way, I try to bridge the gap between the current Long Run Risk asset pricing literature, in which quantities are taken as exogenous, and the standard macroeconomic business cycle models. Preliminary results from a benchmark exchange economy suggest that when there is a Long Run Consumption Risk and the representative agent prefers early resolution of uncertainty, the implied total welfare costs of the consumption uncertainty range from 12\% to 20\%. (JEL classification: E20, E32, G12, D81) |
| Keywords: | Production Economy, Long-Run Risk, Asset Pricing, |
| JEL: | E20 E32 G12 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:582&r=dge |
| By: | Andrea Ferrero (Economics New York University) |
| Abstract: | In this paper, I argue that demographic factors play a central role in accounting for the trade deficit experienced by the U.S. during the last three decades. The main idea is that cross-country demographic differentials lead to adjustments in savings and investments which are associated with international capital flows towards relatively young and rapidly growing economies. I develop a tractable two-country framework with life-cycle structure that formalizes this intuition. The model permits to illustrate analytically and quantitatively the contribution of demographic variables in determining the equilibrium trade balance. I show that persistent differences in population aging can explain a significant fraction of the negative trend in the U.S. trade balance. Notably, the explicit consideration of the demographic transition also helps to reconcile the dynamics of the trade balance with the evolution of the U.S. fiscal deficits and generates a declining pattern for the real interest rate broadly consistent with the data |
| Keywords: | External Imbalances, Aging, Fiscal Deficits |
| JEL: | J11 H87 F32 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:444&r=dge |
| By: | Asli Leblebicioglu (Economics North Carolina State University) |
| Abstract: | Recent empirical research by Kose, Prasad and Terrones (2003) shows that financial integration is associated with higher consumption volatility in developing countries. This paper provides one possible explanation as to how international financial integration can increase consumption volatility in a developing country facing credit market imperfections. I use a two country international real business cycle model where the non-traded sector in the small country faces borrowing constraints due to contract enforceability problems. Financial integration provides households insurance against domestic risks that are amplified by the financial imperfections. If the international risk-sharing opportunities are nonexistent, households can secure themselves only by adjusting their labor effort, which leads to changes in sectorial output and terms of trade. The deterioration of the terms of trade acts as a dampening effect on consumption, causing it to be less volatile under financial autarky relative to financial integration |
| Keywords: | international business cycles, financial integration |
| JEL: | F41 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:651&r=dge |
| By: | Arnaud Costenot (University of California, San Diego) |
| Abstract: | This paper analyzes the determinants of protectionism in a small open economy with search frictions a la PISSARIDES (2000). In equilibrium, jobs generate rents in each sector. Like in the Ricardo-Viner model, the magnitude of those rents may depend on the level of trade protection. The distinct feature of our model is that trade protection may also affect the access to those rents. By raising the domestic price of a given good, a government may attract more firms in a given industry. This raises the probability that a worker will find a job in this sector, and in turn, will benefit from the associated rents. Though simple, our model may help explain a variety of stylized facts regarding the structure of trade protection and individual trade-policy preferences. |
| Keywords: | search frictions, trade protection, trade-policy preferences, |
| Date: | 2006–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsdec:2006-05&r=dge |
| By: | Aubhik Khan; Julia K. Thomas (Department of Economics University of Minnesota) |
| Abstract: | We examine a model of lumpy investment wherein establishments face persistent shocks to common and plant-specific productivity, and nonconvex adjustment costs lead them to pursue generalized (S,s) investment rules. We allow persistent heterogeneity in both capital and total factor productivity alongside low-level investments exempt from adjustment costs to develop the first model consistent with available evidence on establishment-level investment rates. Reassessing the implications of lumpy investment for aggregate dynamics in this setting, we find that they remain substantial when factor supply considerations are ignored, but are quantitatively irrelevant in general equilibrium. The substantial implications of general equilibrium extend beyond the dynamics of aggregate series. While the presence of idiosyncratic shocks makes the time-averaged distribution of plant-level investment rates largely invariant to market-clearing movements in real wages and interest rates, we show that the dynamics of plants' investments differ sharply in their presence. Thus, model-based estimations of capital adjustment costs involving panel data may be quite sensitive to the assumption about equilibrium. Our analysis also offers new insights about how nonconvex adjustment costs influence investment at the plant. When establishments face large and weakly persistent idiosyncratic productivity shocks consistent with existing estimates, we find that nonconvex costs do not cause lumpy investments, but act to eliminate them |
| Keywords: | (S,s) policies, lumpy investment, quantitative general equilibrium |
| JEL: | E32 E22 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:294&r=dge |