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on Dynamic General Equilibrium |
| By: | Oleksiy Kryvtsov; Malik Shukayev; Alexander Ueberfeldt |
| Abstract: | This paper examines the role of monetary policy in an environment with aggregate risk and incomplete markets. In a two-period overlapping-generations model with aggregate uncertainty and nominal bonds, optimal monetary policy attains the ex-ante Pareto optimal allocation. This policy aims to stabilize the savings rate in the economy via the effect of expected inflation on real returns of nominal bonds. The equilibrium under optimal monetary policy is characterized by positive average inflation and a nonstationary price level. In an application a key finding is that optimal monetary policy combines features of inflation and price-level targeting. |
| Keywords: | Monetary policy framework |
| JEL: | E5 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-26&r=dge |
| By: | Caterina Mendicino (Monetary and Financial Analysis Department, Bank of Canada, 234 Wellington St., Ottawa, K1A 0G9, Ontario, Canada.) |
| Abstract: | This paper investigates the role of credit market size as a determinant of business cycle fluctuations. First, using OECD data I document that credit market depth mitigates the impact of variations in productivity to output volatility. Then, I use a business cycle model with borrowing limits a la Kiyotaki and Moore (1997) to replicate this empirical regularity. The relative price of capital and the reallocation of capital are the key variables in explaining the relation between credit market size and output volatility. The model matches resonably well the reduction in productivity-driven output volatility implied by the established size of the credit market observed in OECD data. JEL Classification: E21, E22, E44, G20. |
| Keywords: | Credit frictions, reallocation of capital, asset prices. |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070743&r=dge |
| By: | Richard Rogerson; Johanna Wallenius |
| Abstract: | We build a life cycle model of labor supply that incorporates changes along both the intensive and extensive margin and use it to assess the consequences of changes in tax and transfer policies on equilibrium hours of work. We find that changes in taxes have large aggregate effects on hours of work. Moreover, we find that there is no inconsistency between this result and the empirical finding of small labor elasticities for prime age workers. In our model, micro and macro elasticities are effectively unrelated. Our model is also consistent with other cross-country patterns. |
| JEL: | E2 J2 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13017&r=dge |
| By: | Rochelle M. Edge; Michael T. Kiley; Jean-Philippe Laforte |
| Abstract: | This paper presents a monetary DSGE model of the U.S. economy. The model captures the most important production, expenditure, and nominal-contracting decisions underlying economic data while remaining sufficiently small to allow it to provide a clear interpretation of the data. We emphasize the role of model-based analyses as vehicles for storytelling by providing several examples--based around the evolution of natural rates of production and interest--of how our model can provide narratives to explain recent macroeconomic fluctuations. The stories obtained from our model are both similar to and quite different from conventional accounts. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-08&r=dge |
| By: | Bjoern Bruegemann; Giuseppe Moscarini |
| Abstract: | Recent findings have revived interest in the link between real wage rigidity and employment fluctuations, in the context of frictional labor markets. The standard search and matching model fails to generate substantial labor market fluctuations if wages are set by Nash bargaining, while it can generate fluctuations in excess of what is observed if wages are completely rigid. This suggests that less severe rigidity may suffice. We study a weaker notion of real rigidity, which arises only in frictional labor markets, where the wage is the sum of the worker's opportunity cost (the value of unemployment) and a rent. With wage rigidity this sum is acyclical; we consider rent rigidity, where only the rent is acyclical. We offer two contributions. First, we derive upper bounds on labor market volatility that apply if the model of wage determination generates weakly procyclical worker rents, and that are attained by rent rigidity. Quantitatively, the bounds are tight: rent rigidity generates no more than a third of observed volatility, an outcome that is closer to Nash bargaining than to wage rigidity. Second, we show that the bounds apply to a sequence of famous solutions to the bargaining problem under asymmetric information: at best they generate rigid rents but not rigid wages. |
| JEL: | E24 E32 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13030&r=dge |
| By: | Pierdzioch, Christian; Cenesiz, M. Alper |
| Abstract: | The money multiplier measures the accumulated effect of a monetary policy shock on key macroeconomic variables like output and hours worked. Conventional wisdom suggests that financial market integration should significantly increase the money multiplier. Based on a dynamic general equilibrium model, we derive the result that costs of adjusting hours worked substantially dampen the effect of financial market integration on the money multiplier. Costs of adjusting hours worked capture in an efficient and stylized manner that adjustment processes in the labor market typically are costly and time consuming. Empirical evidence supports the result of our theoretical analysis. |
| Keywords: | Financial market integration; Money multiplier; Costs of adjusting hours worked |
| JEL: | F36 F41 E44 |
| Date: | 2007–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2657&r=dge |
| By: | Diego Restuccia; Richard Rogerson |
| Abstract: | We formulate a version of the growth model in which production is carried out by heterogeneous plants and calibrate it to US data. In the context of this model we argue that differences in the allocation of resources across heterogeneous plants may be an important factor in accounting for cross-country differences in output per capita. In particular, we show that policies which create heterogeneity in the prices faced by individual producers can lead to sizeable decreases in output and measured TFP in the range of 30 to 50 percent. We show that these effects can result from policies that do not rely on aggregate capital accumulation or aggregate relative price differences. More generally, the model can be used to generate differences in capital accumulation, relative prices, and measured TFP. |
| JEL: | E2 O1 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13018&r=dge |
| By: | Vladislav Damjanovic; Charles Nolan |
| Abstract: | We study the impact of two-sided nominal shocks in a simple dynamic, general equilibrium (S,s)-pricing macroeconomic model comprised of heterogeneous sectors. The simple model we develop has a number of appealing empirical implications; it captures why some sectors of the economy have systematically more flexible prices, the smooth dynamics of aggregate output following a monetary shock, and a degree of price asynchronization. Incorporating multiple sectors is central to arriving at these three results. |
| Keywords: | Price rigidity, Ss pricing, macroeconomic dynamics. |
| JEL: | E31 E32 E37 E58 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0709&r=dge |
| By: | Maria João Thompson (Universidade do Minho - NIPE) |
| Abstract: | The presence of complementarities generally makes a growth model nonlinear, hence delivering multiple equilibria. Introducing internal investment costs in the R&D-based growth literature, we develop a growth model which combines the assumptions of complementarities between capital goods in the production function and of internal costly investment in capital. We find that with such combination of complementarities and costly investment, the growth model delivers a single equilibrium. |
| Keywords: | Complementarities, Costly Investment, Economic Growth |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:8/2007&r=dge |
| By: | Fernando Alvarez; Andrew Atkeson; Patrick J. Kehoe |
| Abstract: | The key question asked by standard monetary models used for policy analysis, How do changes in short-term interest rates affect the economy? All of the standard models imply that such changes in interest rates affect the economy by altering the conditional means of the macroeconomic aggregates and have no effect on the conditional variances of these aggregates. We argue that the data on exchange rates imply nearly the opposite: the observation that exchange rates are approximately random walks implies that fluctuations in interest rates are associated with nearly one-for-one changes in conditional variances and nearly no changes in conditional means. In this sense standard monetary models capture essentially none of what is going on in the data. We thus argue that almost everything we say about monetary policy using these models is wrong. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:388&r=dge |