nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒03‒17
six papers chosen by
Christian Zimmermann
University of Connecticut

  1. Taxing Capital? Not a Bad Idea After All! By Juan Carlos Conesa; Sagiri Kitao; Dirk Krueger
  2. On the Consequences of Demographic Change for Rates of Returns to Capital, and the Distribution of Wealth and Welfare By Dirk Krueger; Alexander Ludwig
  3. Firms Dynamics, Bankruptcy Laws and Total Factor Productivity By Hajime Tomura
  4. Unemployment, Inflation and Monetary Policy in a Dynamic New Keynesian Model with Hiring Costs By Abbritti, Mirko; Boitani, Andrea; Damiani, Mirella
  5. Negishi-Solow Efficiency Wages, Unemployment Insurance and Dynamic Deterministic Indeterminacy By Jean-Michel Grandmont
  6. A Structural Model of Australia as a Small Open Economy By Kristoffer Nimark

  1. By: Juan Carlos Conesa (Universitat Autonoma de Barcelona); Sagiri Kitao (New York University); Dirk Krueger (University of Frankfurt, CEPR, CFS and NBER)
    Abstract: In this paper we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks, where households also differ permanently with respect to their ability to generate income. The welfare criterion we employ is ex-ante (before ability is realized) expected (with respect to uninsurable productivity shocks) utility of a newborn in a stationary equilibrium. Embedded in this welfare criterion is a concern of the policy maker for insurance against idiosyncratic shocks and redistribution among agents of different abilities. Such insurance and redistribution can be achieved by progressive labor income taxes or taxation of capital income, or both. The policy maker has then to trade off these concerns against the standard distortions these taxes generate for the labor supply and capital accumulation decision. We find that the optimal capital income tax rate is not only positive, but is significantly positive. The optimal (marginal and average) tax rate on capital is 36%, in conjunction with a progressive labor income tax code that is, to a first approximation, a flat tax of 23% with a deduction that corresponds to about $6,000 (relative to an average income of households in the model of $35,000). We argue that the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is due to the insurance and redistribution role of the income tax system.
    Keywords: Progressive Taxation, Capital Taxation, Optimal Taxation
    JEL: E62 H21 H24
    Date: 2006–10–06
  2. By: Dirk Krueger (University of Frankfurt, CEPR, CFS, MEA, and NBER); Alexander Ludwig (University of Mannheim and MEA,)
    Abstract: This paper employs a multi-country large scale Overlapping Generations model with uninsurable labor productivity and mortality risk to quantify the impact of the demographic transition towards an older population in industrialized countries on world-wide rates of return, international capital flows and the distribution of wealth and welfare in the OECD. We find that for the U.S. as an open economy, rates of return are predicted to decline by 86 basis points between 2005 and 2080 and wages increase by about 4.1%. If the U.S. were a closed economy, rates of return would decline and wages increase by less. This is due to the fact that other regions in the OECD will age even more rapidly; therefore the U.S. is “importing” the more severe demographic transition from the rest of the OECD in the form of larger factor price changes. In terms of welfare, our model suggests that young agents with little assets and currently low labor productivity gain, up to 1% in consumption, from higher wages associated with population aging. Older, asset-rich households tend to lose, because of the predicted decline in real returns to capital.
    Keywords: Population Aging, International Capital Flows, Distribution of Welfare
    JEL: E17 E25 D33 C68
    Date: 2006–08–07
  3. By: Hajime Tomura
    Abstract: This paper analyzes endogenous fluctuations in total factor productivity (TFP) in a dynamic general equilibrium model with heterogeneous agents, and illustrates the interaction of credit market frictions, asset prices, the entry and exit of firms, and fluctuations in TFP in response to firm-level productivity and aggregate credit-market shocks. I also analyze the effect of bankruptcy and foreclosure laws on fluctuations in TFP through their effect on credit market frictions. Implications of the model are consistent with the features of the stagnation in Japan in the 1990s.
    Keywords: Financial stability; Productivity
    JEL: D24 E44 G33
    Date: 2007
  4. By: Abbritti, Mirko; Boitani, Andrea; Damiani, Mirella
    Abstract: The dynamic general equilibrium model with hiring costs presented in this paper delivers involuntary unemployment in the steady state and involuntary fluctuations in unemploy- ment. 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 persis- tence of responses to monetary shocks. Besides, the model can be easily used to assess the impact of di¤erent 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 J64 E32 E31 E52
    Date: 2006–09
  5. By: Jean-Michel Grandmont (CREST, Malakoff Cédex, France)
    Abstract: This paper introduces efficiency wages designed to provide workers with incentives to make appropriate effort levels, and involuntary unemployment, along the pioneering lines of Negishi (1979), Solow (1979), Shapiro and Stiglitz (1984), in a dynamic model involving heterogeneous agents and financial constraints as in Woodford (1986) and Grandmont, Pintus and de Vilder (GPV, 1998). Effort varies continuously while there is unemployment insurance funded out of taxation of labour incomes. Increasing unemployment insurance is beneficial to employment along the deterministic stationary state, and can even in some cases lead to a Pareto welfare improvement for all agents, through general equilibrium effects, by generating higher individual real labour incomes, hence larger consumptions of employed and unemployed workers, and thus a higher production. On the other hand, the local (in)determinacy properties of the stationary state are opposite to those obtained in the competitive specification of the model (GPV, 1998) : local determinacy (indeterminacy) occurs for elasticities of capitalefficient labour substitution lower (larger) than a quite small bound. Increasing unemployment insurance is more likely to lead to local indeterminacy and thus to generate dynamic inefficiencies due to the corresponding expectations coordination failures.
    Keywords: Efficiency wages, involuntary unemployment, unemployment insurance, effort incentives, local indeterminacy, capital-labour substitution, local bifurcations.
    JEL: E24 E32 C62
    Date: 2006
  6. By: Kristoffer Nimark (Reserve Bank of Australia)
    Abstract: This paper sets up and estimates a structural model of Australia as a small open economy using Bayesian techniques. Unlike other recent studies, the paper shows that a small micro-founded model can capture the open economy dimensions quite well. Specifically, the model attributes a substantial fraction of the volatility of domestic output and inflation to foreign disturbances and matches the evidence from reduced-form studies. In addition, the model relies much less than other estimated models on a persistent shock to the risk premium to explain changes in the nominal exchange rate. The paper also investigates the effects of various exogenous shocks on the Australian economy.
    Keywords: small open economy; Australia; Bayesian methods
    JEL: E30 F41
    Date: 2007–02

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