nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒01‒23
five papers chosen by
Christian Zimmermann
University of Connecticut

  1. Issues in Adopting DSGE Models for Use in the Policy Process By Martin Fukac; Adrian Pagan
  2. A Model of Money with Multilateral Matching, Second Version By Manolis Galenianos; Philipp Kircher
  3. Growth Effects of Consumption Jealousy in a Two-Sector Model By Duernecker, Georg
  4. Heterogeneous Firms in a Finite Directed Search Economy By Manolis Galenianos; Philipp Kircher
  5. Quantifying and sustaining welfare gains from monetary commitment By Paul Levine; Peter McAdam; Joseph Pearlman

  1. By: Martin Fukac; Adrian Pagan
    Abstract: Our discussion is structured by three concerns ů model design, matching the data and operational requirements. The paper begins with a general discussion of the structure of dynamic stochastic general equilibrium (DSGE) models where we investigate issues like (i) the type of restrictions being imposed by DSGE models upon system dynamics, (ii) the implication these models would have for ölocation parametersö, viz. growth rates, and (iii) whether these models can track the long-run movements in variables as well as matching dynamic adjustment. The paper further looks at the types of models that have been constructed in central banks for macro policy analysis. We distinguish four generations of these and detail how the emerging current generation, which are often referred to as DSGE models, differs from the previous generations. The last part of the paper is devoted to a variety of topics involving estimation and evaluation of DSGE models.
    Keywords: . DSGE model, Bayesian estimation, model evaluation.
    JEL: C11 C13 C51 C52
    Date: 2006–11
  2. By: Manolis Galenianos (Department of Economics, Penn State University); Philipp Kircher (Department of Economics)
    Abstract: We develop a model of monetary exchange that avoids several common criticisms of the recent microfoundations literature. First, rather than random matching, we assume that buyers know the location of all sellers, and hence the process of finding a partner is deterministic, although trade is still stochastic since the number of buyers visiting a given seller is random. Second, given multilateral matching, rather than bargaining, we assume that goods are allocated according to second-price auctions. Third, given this mechanism, we do not have to assume agents can observe each other’s money holdings or preferences, as is necessary for tractability with bargaining. A novel result is that homogeneous buyers hold different amounts of money, leading to equilibrium price dispersion. We find the closed-form solution for the distribution of money holdings. We characterize equilibrium and efficient monetary policy.
    Keywords: Search Theory of Money, Budget Constrained Auctions, Friedman Rule
    JEL: E41 D83
    Date: 2005–12–01
  3. By: Duernecker, Georg (Department of Economics, European University Institute, Florence, Italy)
    Abstract: This paper aims at analyzing the implications of individuals’ consumption jealousy on the dynamic structure of a two-sector model economy. We find that status-seeking substantially influences both, the long-term properties and the adjustment behavior of the model. Depending on the status motive, productivity disturbances might induce countercyclical responses of work effort whereas preference shocks are expected to generate an overshooting relative capital intensity. Generally we find that, for empirically plausible values of the intertemporal elasticity of substitution, a higher degree of consumption jealousy induces agents to devote more time to education which stimulates human capital accumulation and hence promotes economic growth.
    Keywords: Status-seeking, Economic growth, Transitional dynamics, Human capital
    JEL: D91 E21 O41
    Date: 2007–01
  4. By: Manolis Galenianos (Department of Economics, Penn State University); Philipp Kircher (Department of Economics)
    Abstract: We consider a directed search model for a finite economy with heterogeneous firms in two informational environments. In the first, the productivity of all firms is publicly observed. We prove existence of equilibria in pure posting strategies by firms and show that wage dispersion is driven by fundamentals. That is, more productive firms post higher wages and wage dispersion is absent when firms are homogeneous. When firms have heterogeneous productivities the equilibrium is not constrained efficient. In the second environment the productivity level of each firm is private information. The main results extend to this environment: Equilibria in pure strategies exist; strategies are increasing in productivity; and constrained efficiency does not obtain. When the productivity level of all firms is drawn from the same distribution, symmetric equilibria exist and the ranking of wages equals that of productivity.
    Keywords: Directed Search, Labor Search, Market Power, Wage Differentials, Efficiency
    JEL: J31 J63 L13
    Date: 2007–01–03
  5. By: Paul Levine (Department of Economics, University of Surrey, Guildford, Surrey, GU2 7XH, United Kingdom.); Peter McAdam (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Joseph Pearlman (London Metropolitan University, 31 Jewry Street, London, EC3N 2EY, United Kingdom.)
    Abstract: The objectives of this paper are - first, to quantify the stabilization welfare gains from commitment; second, to examine how commitment to an optimal rule can be sustained as an equilibrium and third, to find a simple interest rate rule that closely approximates the optimal commitment one. We utilize an influential empirical micro-founded DSGE model, the euro area model of Smets and Wouters (2003), and a quadratic approximation of the representative household’s utility as the welfare criterion. Importantly, we impose the effect of a nominal interest rate zero lower bound. In contrast with previous studies, we find significant stabilization gains from commitment - our central estimate is a 0.4 ? 0.5% equivalent permanent increase in consumption, but in a variant with a higher degree of price stickiness, gains of over 2% are found. We also find that a simple optimized commitment rule with the nominal interest rate responding to current inflation and the real wage closely mimics the optimal rule. JEL Classification: E52, E37, E58.
    Keywords: Monetary rules, commitment, discretion, welfare gains.
    Date: 2007–01

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