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on Dynamic General Equilibrium |
| By: | Fabio Canova; David Lopez-Salido; Claudio Michelacci |
| Abstract: | We analyze the labor market effects of neutral and investment-specific technology shocks along the intensive margin (hours worked) and the extensive margin (unemployment). We characterize the dynamic response of unemployment in terms of the job separation and the job finding rate. Labor market adjustments occur along the extensive margin in response to neutral shocks, along the intensive margin in response to investment specific shocks. The job separation rate accounts for a major portion of the impact response of unemployment. Neutral shocks prompt a contemporaneous increase in unemployment because of a sharp rise in the separation rate. This is prolonged by a persistent fall in the job finding rate. Investment specific shocks rise employment and hours worked. Neutral shocks explain a substantial portion of the volatility of unemployment and output; investment specific shocks mainly explain hours worked volatility. This suggests that neutral progress is consistent with Schumpeterian creative destruction, while investment-specific progress operates as in a neoclassical growth model. |
| Keywords: | Search frictions, technological progress, creative destruction |
| JEL: | E00 J60 O33 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1012&r=dge |
| By: | Juan A. Rojas (Banco de España); Carlos Urrutia (Centro de Investigación Económica, Instituto Tecnológico Autónomo de México (ITAM)) |
| Abstract: | We study the aggregate effects of a social security reform in a large overlapping generations model where markets are incomplete and households face uninsurable idiosyncratic income shocks. We depart from the previous literature by assuming that, because of lack of commitment in the credit market, the borrowing constraint in the unique asset is endogenously determined by the agents' incentives to default on previous debts. We find that a model with fixed borrowing constraints overestimates the positive effect of reforming social security on the capital stock and the saving rate, compared to our model with endogenous borrowing limit. The reason is that, in the latter, the size of precautionary savings is smaller because after the reform the incentives to default on previous debts are lower and consequently households face more relaxed borrowing limits. Adding retirement accounts to the basic model does not change these conclusions, although the quantitative importance of endogenizing borrowing constraints is reduced. |
| Keywords: | social security, borrowing constraints, retirement accounts |
| JEL: | E6 G23 H55 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0602&r=dge |
| By: | Andrea Caggese |
| Abstract: | We develop a model of an industry with many heterogeneous firms that face both financing constraints and irreversibility constraints. The financing constraint implies that firms cannot borrow unless the debt is secured by collateral; the irreversibility constraint that they can only sell their fixed capital by selling their business. We use this model to examine the cyclical behavior of aggregate fixed investment, variable capital investment, and output in the presence of persistent idiosyncratic and aggregate shocks. Our model yields three main results. First, the effect of the irreversibility constraint on fixed capital investment is reinforced by the financing constraint. Second, the effect of the financing constraint on variable capital investment is reinforced by the irreversibility constraint. Finally, the interaction between the two constraints is key for explaining why input inventories and material deliveries of US manufacturing firms are so volatile and procyclical, and also why they are highly asymmetrical over the business cycle. |
| Keywords: | Financing Constraints, Irreversibility, Investment |
| JEL: | D21 E22 E32 G31 |
| Date: | 2001–06 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1008&r=dge |
| By: | Andres Erosa; Tatyana Koreshkova; Diego Restuccia |
| Abstract: | We develop a quantitative theory of human capital investment in order to evaluate the magnitude of cross-country differences in total factor productivity (TFP) that explains the variation in per-capita incomes across countries. We build a heterogeneous-agent economy with cross-sectional variation in ability, schooling, and expenditures on schooling quality. In our theory, the parameters governing human capital production and random ability process have important implications for a set of cross-sectional statistics - Mincer return, variance of earnings, variance of schooling, and intergenerational correlation of earnings. These restrictions of the theory and U.S. household data are used to pin down the key parameters driving the quantitative implications of the theory. Our main finding is that human capital accumulation strongly amplifies TFP differences across countries. In particular, we find an elasticity of output per worker with respect to TFP of 2.8: a 3-fold difference in TFP explains a 20-fold difference in output per worker. We argue that the cross-country differences in human capital implied by the theory are consistent with a wide array of evidence including earnings of immigrants in the United States, average mincer returns across countries, and the relationship between average years of schooling and per-capita income across countries. The theory implies that using Mincer returns to measure human capital understates differences across countries by a factor of 2. |
| Keywords: | output per worker, TFP, human capital, heterogeneity, inequality |
| JEL: | O1 |
| Date: | 2007–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-280&r=dge |
| By: | Ritter, Moritz |
| Abstract: | This paper incorporates a distortionary tax into the microfoundations of money framework and revisits the optimum quantity of money. An optimal policy may consist of both a positive tax rate and a positive nominal interest rate: if the buyer’s surplus share is inefficiently small, the intensive margin is distorted and the constrained optimal policy combines a sales tax with a money growth rate above that prescribed by the Friedman rule. Monetary, but not fiscal, policy alters the agent’s bargaining position, leaving a special role for a deviation from the Friedman rule. Under similar conditions, this conclusion carries over to competitive pricing. |
| Keywords: | Money; Search; Friedman Rule; Sales Tax |
| JEL: | H21 E63 E62 |
| Date: | 2007–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:1973&r=dge |
| By: | Michael Reiter |
| Abstract: | The paper shows that a matching model where technological change is partially embodied in the job match is successful in explaining the variability of unemployment and vacancies. If we incorporate long-term wage contracts into the model, it also explains a number of stylized facts on the dynamics of real wages, which have been found in the empirical labor literature. |
| Keywords: | Unemployment, wage dynamics, embodied technical change |
| JEL: | E24 E32 J64 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:980&r=dge |
| By: | Reis, Catarina |
| Abstract: | This paper considers a Ramsey model of linear capital and labor income taxation in which a benevolent government cannot commit ex-ante to a sequence of taxes for the future. In this setup, if the government is allowed to borrow and lend to the consumers, the optimal capital income tax is zero in the long run. This result stands in marked contrast with the recent literature on optimal taxation without commitment, which imposes budget balance and typically finds that the optimal capital income tax does not converge to zero. Since it is efficient to backload incentives, breaking budget balance allows the government to generate surplus that reduces its debt or increases its assets over time until the lack of commitment is no longer binding and the economy is back in the full commitment solution. Therefore, while the lack of commitment does not change the optimal capital tax in the long run, it may impose an upper bound on the level of long run debt. |
| Keywords: | Fiscal Policy; Optimal Taxation; Incidence; Debt |
| JEL: | H22 E62 H62 H21 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2071&r=dge |
| By: | Andrea Caggese |
| Abstract: | In this paper I develop a general equilibrium model with risk averse entrepreneurial firms and with public firms. The model predicts that an increase in uncertainty reduces the propensity of entrepreneurial firms to innovate, while it does not affect the propensity of public firms to innovate. Furthermore, it predicts that the negative effect of uncertainty on innovation is stronger for the less diversified entrepreneurial firms, and is stronger in the absence of financing frictions in the economy. In the second part of the paper I test these predictions on a dataset of small and medium Italian manufacturing firms. |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1011&r=dge |
| By: | Norman Swanson (Rutgers University); Oleg Korenok (Virginia Commonwealth University) |
| Abstract: | In this paper, we add to the literature on the assessment of how well RBC simulated data reproduce the dynamic features of historical data. In particular, we evaluate a variety of new Keynesian DSGE models, including the standard sticky price model discussed in Calvo (1983), the sticky price with dynamic indexation model discussed in Christiano, Eichenbaum and Evans (2001), Smets and Wouters (2003), and Del Negro and Schorfheide (2005), and the sticky information model of Mankiw and Reis (2002). We carry out our evaluation by using standard impulse response and correlation measures and via use of a distribution based approach for comparing all of our (possibly) misspecified DSGE models via direct comparison of simulated inflation and output gap values with corresponding historical values. In this sense, our analysis can be thought of as an empirical model selection exercise. In addition, and given that one of our objectives is to choose the model which yields simulation distributions that are closest to the historical record, our analysis can be viewed as a type of predictive density model selection, where the “best” simulated distributions can be used as predictive densities whenever the starting values for the simulations correspond to those actual historical values which are most recently available. Some important precedents to our approach to accuracy assessment include DeJong, Ingram, and Whiteman (1996) and Geweke (1999a,b). One of our main findings is that for a standard level of stickiness (i.e. annual price or information adjustment), the sticky price model with indexation dominates other models. However, when models are calibrated using the lower level of information and price stickiness, there is much less to choose from between the models. |
| Keywords: | empirical distribution, model selection, sticky information, sticky price |
| JEL: | C32 E12 E3 |
| Date: | 2006–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:200612&r=dge |
| By: | Andrea Caggese |
| Abstract: | We consider a dynamic multifactor model of investment with financing imperfections, adjustment costs and fixed and variable capital. We use the model to derive a test of financing constraints based on a reduced form variable capital equation. Simulation results show that this test correctly identifies financially constrained firms even when the estimation of firms’ investment opportunities is very noisy. In addition, the test is well specified in the presence of both concave and convex adjustment costs of fixed capital. We confirm empirically the validity of this test on a sample of small Italian manufacturing companies. |
| Keywords: | Financing Constraints, Investment |
| JEL: | D21 G31 |
| Date: | 2003–02 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1009&r=dge |
| By: | Norman Swanson (Rutgers University); Oleg Korenok (Virginia Commonwealth University) |
| Abstract: | In this paper we construct output gap and inflation predictions using a variety of DSGE sticky price models. Predictive density accuracy tests related to the test discussed in Corradi and Swanson (2005a) as well as predictive accuracy tests due to Diebold and Mariano (1995) andWest (1996) are used to compare the alternative models. A number of simple time series prediction models (such as autoregressive and vector autoregressive (VAR) models) are additionally used as strawman models. Given that DSGE model restrictions are routinely nested within VAR models, the addition of our strawman models allows us to indirectly assess the usefulness of imposing theoretical restrictions implied by DSGE models on unrestricted econometric models. With respect to predictive density evaluation, our results suggest that the standard sticky price model discussed in Calvo (1983) is not outperformed by the same model augmented either with information or indexation, when used to predict the output gap. On the other hand, there are clear gains to using the more recent models when predicting inflation. Results based on mean square forecast error analysis are less clear-cut, although the standard sticky price model fares best at our longest forecast horizon of 3 years, and performs relatively poorly at shorter horizons. When the strawman time series models are added to the picture, we find that the DSGE models still fare very well, often winning our forecast competitions, suggesting that theoretical macroeconomic restrictions yield useful additional information for forming macroeconomic forecasts. |
| Keywords: | model selection, predictive density, sticky information, sticky price |
| JEL: | C32 E12 E3 |
| Date: | 2006–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:200615&r=dge |
| By: | Fabio Canova; Claudio Michelacci |
| Abstract: | We analyze the effects of neutral and investment-specific technology shocks on hours worked and output. Low frequency movements in hours are captured in a variety of ways. Hours robustly fall in response to neutral shocks and robustly increase in response to investment specific shocks. The percentage of the variance of hours (output) explained by neutral shocks is small (large); the opposite is true for investment specific shocks. News shocks and other shocks are uncorrelated with the estimated neutral and investment specific shocks. |
| Keywords: | Technology disturbances, structural VARs, low frequency movements, news shocks |
| JEL: | E00 J60 O33 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1013&r=dge |
| By: | Steffan Ball |
| Abstract: | In this paper we present a calibrated life-cycle model which is able to simultaneously match asset allocations and stock market participation profiles over the life-cycle. The inclusion of per period fixed costs and a public pension scheme eradicates the need to assume heterogeneity in preferences, or implausible parameter values, in order to explain observed patterns. We find a per period fixed cost of less than two percent of the permanent component of annual labour income can explain the limited stock market participation. More generous public pensions are seen to crowd out private savings and significantly reduce the estimates of these fixed costs. This is the first time that concurrent matching of participation and shares has been achieved within the standard preference framework. |
| Keywords: | precautionary saving, portfolio choice, stock market participation and uninsurable labour income risk |
| JEL: | G11 H31 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0707&r=dge |