nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒01‒14
seven papers chosen by
Christian Zimmermann
University of Connecticut

  1. Should Old-age Benefits Be Earnings-tested By Niku Määttänen; Panu Poutvaara
  2. Consumption and Habit Formation when Time Horizon is Finite By Voila Angelini
  3. The Direction of Technical Change in Capital-Resource Economies By Di Maria, Corrado; Valente, Simone
  4. Taxation and Transaction Costs in a General Equilibrium Asset Economy By Frank Milne; Xing Jin
  5. What does a technology shock do? A VAR analysis with model-based sign restrictions By Luca Dedola; Stefano Neri
  6. Externalities from International Labor Migration: Efficacy of a Brain Drain Tax in the Euro-Mediterranean Region By Mehmet Tosun
  7. The Roles of Temptation and Social Security in Explaining Individual Behavior By Alessandro Bucciol

  1. By: Niku Määttänen; Panu Poutvaara
    Abstract: We study the welfare effects of earnings testing flat-rate old-age benefits in a quantitative overlapping generations model with idiosyncratic labor income risk. In our model economy, even a moderate earnings testing reduces individuals´ expected lifetime utility. Moreover, it also lowers the realized lifetime utilities of those at the bottom of the lifetime utility distribution.
    Keywords: social security, retirement, means-testing, computational models
    JEL: H55 J26 C68
    Date: 2006–12–18
  2. By: Voila Angelini
    Abstract: This paper provides a closed-form solution under labour uncertainty for optimal consumption and the value function in a finite horizon life-cycle model with habit persistence.
    Keywords: habit formation, life-cycle consumption, precautionary saving
    JEL: D91 C61
    Date: 2006–12
  3. By: Di Maria, Corrado; Valente, Simone
    Abstract: We analyze a multi-sector growth model with directed technical change where man-made capital and exhaustible resources are essential for production. The relative profitability of factor-specific innovations endogenously determines whether technical progress will be capital- or resource-augmenting. We show that convergence to balanced growth implies zero capital-augmenting innovations: in the long run, the economy exhibits purely resource-augmenting technical change. This result provides sound microfoundations for the broad class of models of exogenous/endogenous growth where resource-augmenting progress is required to sustain consumption in the long run, contradicting the view that these models are conceptually biased in favor of sustainability.
    Keywords: Endogenous Growth; Directed Technical Change; Exhaustible Resources; Sustainability
    JEL: Q32 O33 O31 O32
    Date: 2006–03–07
  4. By: Frank Milne (Queen's University); Xing Jin (University of Warwick)
    Abstract: Most financial asset pricing models assume frictionless, competitive markets that imply the absence of arbitrage opportunities. Given the absence of arbitrage opportunities and complete asset markets, there exists a unique martingale measure that implies martingale pricing formulae and replicating asset portfolios. In incomplete markets, or markets with transaction costs, these results must be modified to admit non-unique measures and the possibility of imperfectly replicating portfolios. Similar difficulties arise in markets with taxation. Some theoretical research has argued that some taxation functions will imply arbitrage opportunities and the non-existence of a competitive asset economy. In this paper we construct a multi-period, discrete time/state general equilibrium model of asset markets with transaction costs and taxes. The transaction cost technology and the tax system are quite general, so that we can include most discrete time/state models with transaction costs and taxation. We show that a competitive equilibrium exists. Our results require careful modeling of the government budget constraints to rule out tax arbitrage possibilities.
    Keywords: Taxation, Transaction Costs, General Equilibrium, Asset Economy
    JEL: D52 G38 G12
    Date: 2006–10
  5. By: Luca Dedola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Stefano Neri (Bank of Italy, Via Nazionale, 91 , 00184 Roma, Italy.)
    Abstract: This paper estimates the effects of technology shocks in VAR models of the U.S., identified by imposing restrictions on the sign of impulse responses. These restrictions are consistent with the implications of a popular class of DSGE models, with both real and nominal frictions, and with sufficiently wide ranges for their parameterers. This identification strategy thus substitutes theoretically-motivated restrictions for the atheoretical assumptions on the time-series properties of the data that are key to long-run restrictions. Stochastic technology improvements persistently increase real wages, consumption, investment and output in the data; hours worked are very likely to increase, displaying a hump-shaped pattern. Contrary to most of the related VAR evidence, results are not sensitive to a number of specification assumptions, including those on the stationarity properties of variables. JEL Classification: C3, E3.
    Keywords: Technology shocks, DSGE models, Bayesian VAR methods, Identification.
    Date: 2006–12
  6. By: Mehmet Tosun (Department of Economics, University of Nevada, Reno)
    Abstract: This paper uses a two-region, two-period overlapping generations model with international labor mobility to examine the efficacy of using tax policy to internalize the externalities created by international labor migration. While a brain drain tax has a substantial limiting effect on labor migration and a small negative effect on per worker growth, it is found to be a viable solution to the negative externality problem. It is also found that the brain-drain tax can raise substantial tax revenue for the SMCs which could be used to enhance human capital in the region.
    Keywords: International labor mobility, brain-drain tax, population aging, overlapping generations, endogenous tax policy, Euro-Mediterranean region
    JEL: E62 F22 H23 H24 H41
    Date: 2006–12
  7. By: Alessandro Bucciol (University of Padua)
    Abstract: I simulate a life-cycle model with preferences described by a utility function a' la Gul and Pesendorfer (2001). I show that temptation to consume contributes to explain the saving, retirement consumption, and asset allocation puzzles. I perform two analyses, with and without Social Security protection, separately for the US and Italy. The pension replacement rate is endogenous in the model and varies with income realizations. The results also show that the optimal behavior differs remarkably between the two countries when Social Security is considered. In particular, the more generous Italian system depresses savings and investments of more tempted individuals.
    JEL: D91 E21 G11
    Date: 2006–12

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