nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒02‒17
fifteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Investment-Specific Technology Shocks and Labor Market Frictions By Reinout De Bock
  2. Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach By Frank Smets; Raf Wouters
  3. Can heterogeneous preferences stabilize endogenous fluctuations ?. By Stefano Bosi; Thomas Seegmuller
  4. Time-Consistent Control in Non-Linear Models By Steve Ambler; Florian Pelgrin
  5. Inside Money, Credit, and Investment By Dressler, Scott; Li, Victor
  6. Technology Shocks and Business Cycles: The Role of Processing Stages and Nominal Rigidities By Louis Phaneuf; Nooman Rebei
  7. Unemployment, Inflation and Monetary Policy in a Dynamic New Keynesian Model with Hiring Costs By Mirko Abbritti
  8. Market structure and business cycles: Do nominal rigidities influence the importance of real shocks? By Dave, Chetan; Dressler, Scott
  9. Public Budget Composition, Fiscal(De)Centralization, and Welfare By Calin Arcalean; Gerhard Glomm; Ioana Schiopu; Jens Suedekum
  10. Rent Taxation in a Small Open Economy: The Effect on Transitional Generations By Marko Koethenbuerger; Panu Poutvaara
  11. Intergenerational Transfers of Time and Public Long-term Care with an Aging Population By Atsue Mizushima
  12. Rentabilité d'actifs et fluctuations économiques : une perspective d'équilibre général dynamique et stochastique By Kevin Elie Beaubrun-Diant; Julien Matheron
  13. Allocation chômage : entre efficacité et égalité. By Audrey Desbonnet
  14. Permis de pollution et contraintes politiques dans un modèle à générations imbriquées By Pierre-André Jouvet; Fabien Prieur
  15. Optimal growth in overlapping generations with a directly polluting sector and an indirect one By Pierre-André Jouvet; Philippe Michel; Gilles Rotillon

  1. By: Reinout De Bock (Northwestern University, Department of Economics)
    Abstract: This paper studies the implications of technical progress through investment-specific technical change in a business cycle model with search and matching frictions and endogenous job destruction. The interaction between the capital formation needed to reap the benefits of an investment-specific technology shock and gradual labor-market matching, generates hump-shaped, persistent responses in output, vacancies, and unemployment. The endogenous job destruction decision also leads to small but persistent endogenous fluctuations in total factor productivity. Simulations suggest a limited role for investment-specific technology shocks as a source of business cycle fluctuations compared to a standard real business cycle model.
    Keywords: LaborMarket Frictions, Investment-specific Technology Shocks, Business Cycles
    JEL: E24 E32 J64
    Date: 2007–01
  2. By: Frank Smets (ECB, CEPR and University of Ghent); Raf Wouters (NBB, Research Department)
    Abstract: Using a Bayesian likelihood approach, we estimate a dynamic stochastic general equilibrium model for the US economy using seven macro-economic time series. The model incorporates many types of real and nominal frictions and seven types of structural shocks. We show that this model is able to compete with Bayesian Vector Autoregression models in out-of-sample prediction. We investigate the relative empirical importance of the various frictions. Finally, using the estimated model we address a number of key issues in business cycle analysis: What are the sources of business cycle fluctuations? Can the model explain the cross-correlation between output and inflation? What are the effects of productivity on hours worked? What are the sources of the “Great Moderation”?
    Keywords: DSGE models, monetary policy
    JEL: E4 E5
    Date: 2007–02
  3. By: Stefano Bosi (EQUIPPE et EPEE); Thomas Seegmuller (Centre d'Economie de la Sorbonne)
    Abstract: While most of the literature concerned with indeterminacy and endogenous cycles is based on the questionable assumption of a representative consumer, some recent works have investigated the role of heterogeneous agents on dynamics. This paper adds a contribution to the debate, highlighting the effects of heterogeneity in consumers' preferences within an overlapping generations economy with capital accumulation, endogenous labor supply and consumption in both periods. Using a mean-preserving approach to heterogeneity, we show that increasing the dispersion of propensities to save turns out to stabilize the macroeconomic volatility, by reducing the range of parameters compatible with indeterminacy and ruling out expectations-driven fluctuations under a sufficiently large heterogeneity.
    Keywords: Endogenous fluctuations, heterogeneous preferences, mean-preserving dispersion, overlapping generations.
    JEL: C62 E32
    Date: 2006–12
  4. By: Steve Ambler; Florian Pelgrin
    Abstract: We show how to use optimal control theory to derive optimal time-consistent Markov-perfect government policies in nonlinear dynamic general equilibrium models, extending the result of Cohen and Michel (1988) for models with quadratic objective functions and linear dynamics. We replace private agents' costates by flexible functions of current states in the government's maximization problem. The functions are verified in equilibrium to an arbitrarily close degree of approximation. They can be found numerically by perturbation or projection methods. We use a stochastic model of optimal public spending to illustrate the technique.
    Keywords: Fiscal policy; Monetary policy framework
    JEL: E61 E62 C63
    Date: 2007
  5. By: Dressler, Scott; Li, Victor
    Abstract: This paper presents a monetary explanation for several business-cycle facts: (i) household and business investment are procyclical, (ii) business investment lags household investment, (iii) household investment is positively correlated with M1, and (iv) household credit outstanding is positively correlated with and more volatile than household investment. We develop a dynamic general equilibrium model that features financial intermediaries accepting deposits and providing loans, credit-producing firms, and inside (bank-created) money. It is shown that the transmission of monetary shocks facilitated by credit and inside money creation is able to reconcile these real and monetary observations regarding the cyclical behavior of investment.
    JEL: G11 E39 C68
    Date: 2007–01
  6. By: Louis Phaneuf; Nooman Rebei
    Abstract: This paper develops and estimates a dynamic general equilibrium model that realistically accounts for an input-output linkage between firms operating at different stages of processing. Firms face technological change which is specific to their processing stage and charge new prices according to stage-specific Calvo-probabilities. Only a fixed fraction of households have an opportunity to adjust nominal wages to new information each period. Intermediate-stage technology shocks account for the bulk of output variability at business cycle frequencies, while final-stage technology shocks do not explain much. Although technology shocks drive the business cycle, the model predicts weakly procyclical real wages, and a near-zero correlation between return to working and hours worked. Furthermore, the model has rich implications for the dynamics of business cycles.
    Keywords: Business fluctuations and cycles; Economic models
    JEL: E32
    Date: 2007
  7. By: Mirko Abbritti (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: The dynamic general equilibrium model with hiring costs presented in this paper delivers involuntary unemployment in the steady state and involuntary fluctuations in unemployment. After calibrating the model, through simulations we are able to show that our model with labour market imperfections outperforms the standard NK model as for the persistence of responses to monetary shocks. Besides, the model can be easily used to assess the impact of different market imperfections on both the steady state and the dynamics of the economy. We are also able to show how two economies, differing in their "degrees of imperfection", react to policy or non policy shocks: a rigid economy turns out to be less volatile than a flexible economy. Something that reflects the actual experience of the US (flexible) and European (rigid) economies.
    Keywords: Hiring Costs, Wage Bargaining, Output Gap, New Keynesian Phillips Curve, Monetary Policy
    JEL: E24 E31 E32 E52 J64
    Date: 2007–01
  8. By: Dave, Chetan; Dressler, Scott
    Abstract: This paper investigates the relative importance of shocks to total factor productivity (TFP) versus the marginal efficiency of investment (MEI) in explaining cyclical variations. The literature offers contrasting results: TFP shocks are important in neoclassical environments, while relatively unimportant in neo-Keynesian environments. A model with endogenous capital utilization captures both results depending upon the degree of nominal rigidity. In the model, MEI shocks create a wedge between the nominal returns on bonds and capital. Nominal rigidities activate this wedge and place the relative importance on MEI shocks, while TFP shocks dominate when prices are perfectly flexible.
    Keywords: Business Cycle Fluctuations; Nominal Rigidities; Exogenous Shocks
    JEL: E32 C51
    Date: 2007–02
  9. By: Calin Arcalean (Indiana University); Gerhard Glomm (Indiana University); Ioana Schiopu (Indiana University); Jens Suedekum (University of Konstanz)
    Abstract: We present a dynamic two-region model with overlapping generations. There are two types of public expenditure, education and infrastructure funding, and governments decide optimally on budget size (tax rate) and its allocation across the two outlays. Productivity of government infrastructure spending can differ across regions. This assumption follows well established empirical evidence, and highlights regional heterogeneity in a previously unexplored dimension. We study the implications of three different fiscal regimes for capital accumulation and aggregate national welfare. Full centralization of revenue and expenditure decisions is the optimal fiscal arrangement for the country when infrastructure spending productivity is similar across regions. When regional differences exist but are not too large, the partial centralization regime is optimal where the federal government sets a common tax rate, but allows the regional governments to decide on the budget composition. Only when the differences are sufficiently large does full decentralization become the optimal regime. National steady state output is instead highest when the economy is decentralized. This result is consistent with the “Oates conjecture” that fiscal decentralization increases capital accumulation. However, in terms of welfare this result can be reversed.
    Keywords: fiscal federalism, capital accumulation, infrastructure, public education
    JEL: E6 H5 H7
    Date: 2007–02
  10. By: Marko Koethenbuerger (CES, University of Munich and CESifo); Panu Poutvaara (University of Helsinki and IZA)
    Abstract: We show that taxation of rents may yield an intergenerational Pareto-improvement in a small open economy provided tax revenues are earmarked to reduce wage taxes. Previous literature has shown that rent taxation benefits current young and future generations, while we show that it also benefits the current old generation when the initially prevailing tax mix is sufficiently skewed towards wage taxation.
    Keywords: rent taxes, capitalization, transitional dynamics, labor supply, asset prices
    JEL: H22 E62 F02
    Date: 2007–01
  11. By: Atsue Mizushima (Graduate School of Economics, Osaka University)
    Abstract: In this paper, we use a two-period overlapping generations model to examine the behavior of an economy that incorporates intergenerational transfers of time. In the first part, we describe the dynamics and steady state of the economy in which there is no government. We show that the rate of life expectancy has negative impact on the steady-state level of the capital stock. In the second part, we study the role and the effect of public long-term care policy. We also show that public long-term care lowers the steady-state level of the capital stock but enhances the welfare when the rate of tax is small.
    Keywords: time transfers, household production, overlapping generations
    JEL: E60 I12 J14 J22
    Date: 2007–02
  12. By: Kevin Elie Beaubrun-Diant; Julien Matheron
    Abstract: This review presents the main tools and results of the research between finance and macroeconomics. The ambition of this literature is to provide a joint analysis of the business cycle and financial asset returns. This paper adopts this perspective and suggests a critical analysis of the mechanisms of modelling a DSGE model, so that this one is compatible with the assets returns stylized facts without sacrificing for business cycle facts.
    JEL: E10 E20 G12
    Date: 2006
  13. By: Audrey Desbonnet (Centre d'Economie de la Sorbonne)
    Abstract: This paper reconsiders the trade-off between efficiency and equality of unemployment insurance in a job search model with precautionary saving. Contrary to Cahuc and Lehmann [2000], we show that a decreasing profile of unemployment benefits is able to alleviate this trade-off when agents can save. It is due to a change in saving time profile and an increase in job search effort. The short term unemployed begins to save when unemployment benefits become declining. When the unemployment episode expands, he becomes long term unemployed and dissaves which enables to support his consumption to a higher level.
    Keywords: Unemployment benefits, precautionary saving, equality, efficiency.
    JEL: E24 D69 J65
    Date: 2006–12
  14. By: Pierre-André Jouvet; Fabien Prieur
    Abstract: We develop an overlapping generations model of growth in which production generates polluting harmful emissions. In order to control pollution, the government implements an emission permits system. However, subject to political constraints, it is not able to assign the optimal quota on emissions. Hence, in such a framework, regulating pollution solely by permits does not allow the decentralized economy to achieve the long run social optimum. Our contribution is then to show that the combination of the existing permits system with a policy intended to promote a price discrimination between agents on the permits market, is a mean not only to circumvent these rigidities but also to restore the Pareto optimality of the equilibrium.
    JEL: D91 Q28 H23
    Date: 2006
  15. By: Pierre-André Jouvet; Philippe Michel; Gilles Rotillon
    Abstract: We study the optimal growth path and its decentralization in an overlapping generations model with two consumption goods and pollution effect. We consider two production sector i.e. one with a direct effect of pollution and the other with an indirect pollution effect by using energy. In the presence of externalities, decentralization of an optimal path needs some specific taxes in addition to lump-sum transfers. The introduction of a market for pollution permits, concerning only the polluting sector, neutralizes the external environmental effects. We show that there is a unique management of permits such that the equilibrium coincides with the optimal path: all permits should be auctioned i.e. no free permits to firms. This conclusion is in contradiction with the usual practice of grandfathering.
    Keywords: Optimal growth, environment, market of permits.
    JEL: D61 D9 Q28
    Date: 2006

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