nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒04‒21
thirteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Labor Search and Matching in Macroeconomics By Eran Yashiv
  3. Search Frictions on Product and Labor Markets: Money in the Matching Function By Etienne Lehmann; Bruno Van der Linden
  4. "Optimal Policy and (the Lack of) Time Inconsistency: Insights from Simple Models" By Marina Azzimonti, Pierre-Daniel Sarte, Jorge Soares; Pierre-Daniel Sarte; Jorge Soares
  5. Convergence, capital accumulation and the nominal exchange rate By Péter Benczúr; István Kónya
  6. Concerning Technology Adoption and Inequality By Radhika Lahiri; Shyama Ratnasiri
  7. Forecasting with estimated dynamic stochastic general equilibrium models: The role of nonlinearities By Paul Pichler
  9. High Relocation Costs in Search-Matching Models: Theory and Application to Spatial Mismatch By Yves Zenou
  10. Endogenous Job Destruction and Job Matching in Cities By Yves Zenou
  11. On the Dynamic Programming approach to economic models governed by DDE's By Fabbri, Giorgio; Faggian, Silvia; Gozzi, Fausto
  13. Monetary Policy Inertia or Persistent Shocks: A DSGE Analysis By CARRILLO, Julio; FÈVE, Patrick; MATHÉRON, Julien

  1. By: Eran Yashiv (Tel Aviv University, CEPR, CEP (LSE) and IZA)
    Abstract: The labor search and matching model plays a growing role in macroeconomic analysis. This paper provides a critical, selective survey of the literature. Four fundamental questions are explored: how are unemployment, job vacancies, and employment determined as equilibrium phenomena? What determines worker flows and transition rates from one labor market state to another? How are wages determined? What role do labor market dynamics play in explaining business cycles and growth? The survey describes the basic model, reviews its theoretical extensions, and discusses its empirical applications in macroeconomics. The model has developed against the background of difficulties with the use of the neoclassical, frictionless model of the labor market in macroeconomics. Its success includes the modelling of labor market outcomes as equilibrium phenomena, the reasonable fit of the data, and - when inserted into business cycle models - improved performance of more general macroeconomic models. At the same time, there is evidence against the Nash solution used for wage setting and an active debate as to the ability of the model to account for some of the cyclical facts.
    Keywords: search, matching, macroeconomics, business cycles, worker flows, growth, policy
    JEL: E24 E32 E52 J23 J31 J41 J63 J64 J65
    Date: 2007–04
  2. By: Edda Claus; Iris Claus
    Abstract: Understanding the transmission channels of shocks is critical for successful policy response. This paper develops a dynamic general equilibrium model to assess the relative importance of the interest rate, the exchange rate and the credit channels in transmitting shocks in an open economy. The relative contribution of each channel is determined by comparing the impulse responses when the relevant channel is suppressed with the impulse responses when all three channels are operating. The results suggest that all three channels contribute to business cycle fluctuations and the transmission of shocks to the economy. But the magnitude of the impact of the interest rate channel crucially depends on the inflation process and the structure of the economy.
    JEL: E32 E44 E50 F41
    Date: 2007–02
  3. By: Etienne Lehmann (CREST, Université Catholique de Louvain and IZA); Bruno Van der Linden (Université Catholique de Louvain, FNRS, ERMES and IZA)
    Abstract: This paper builds a macroeconomic model of equilibrium unemployment in which firms persistently face difficulties in selling their production and this affects their decisions to create jobs. Due to search-frictions on the product market, equilibrium unemployment is a U-shaped function of the ratio of total demand to total supply on this market. When prices are at their Competitive Search Equilibrium values, the unemployment rate is minimized. Yet, the Competitive Search Equilibrium is not efficient. Inflation is detrimental to unemployment.
    Keywords: equilibrium unemployment, matching, inflation, demand constraints
    JEL: E12 E24 E31 J63
    Date: 2007–03
  4. By: Marina Azzimonti, Pierre-Daniel Sarte, Jorge Soares (Department of Economics, University of Iowa); Pierre-Daniel Sarte (Federal Reserve Bank of Richmond); Jorge Soares (Department of Economics,University of Delaware)
    Abstract: In the standard neoclassical model with a representative agent, a benevolent planner who can commit to future policies will, if feasible, levy a single confiscatory tax on capital in the initial period and commit never to set positive taxes thereafter. We show that this policy, which allows for the disposal of distortional taxes entirely, can arise even when sequential governments are unable to credibly promise future tax rates, regardless of how public expenditures are determined.
    Keywords: Capital Taxation, Ramsey, Commitment, Markov-Perfect equilibrium, Time consistent policy, Overlapping Generations
    JEL: H3 H6 H21 E62
    Date: 2006
  5. By: Péter Benczúr (Magyar Nemzeti Bank); István Kónya (Magyar Nemzeti Bank)
    Abstract: This paper develops a flexible price, two-sector nominal growth model, in order to study the role of the exchange rate regime in capital accumulation (convergence). We adopt a standard model of a small open economy with traded and nontraded goods, and enrich its structure with costly investment and a preference for real money holdings. We find that (i) the choice of exchange rate regime influences the transition dynamics of a small open economy, (ii) a one-sector model does not adequately capture the channels through which the nominal side interacts with real variables, and (iii) as a consequence, sectoral asymmetries are important for understanding the effects of the exchange rate regime on capital accumulation.
    Keywords: two-sector growth model, small open economy, capital accumulation, household portfolios, real effects of nominal shocks.
    JEL: F32 F41 F43
    Date: 2007
  6. By: Radhika Lahiri; Shyama Ratnasiri
    Abstract: Empirical evidence suggests that there has been a divergence over time in income distributions across countries and within countries. Furthermore, developing economies show a great deal of diversity in their growth patterns during the process of economic development. For example, some of these countries converge rapidly on the leaders, while others stagnate, or even experience reversals and declines in their growth processes. In this paper we study a simple dynamic general equilibrium model with household specific costs of technology adoption which is consistent with these stylized facts. In our model, growth is endogenous, and there are two-period lived overlapping generations of agents, assumed to be heterogeneous in their initial holdings of wealth and capital. We find that in a special case of our model, with costs associated with the adoption of more productive technologies fixed across households, inequalities in wealth and income may increase over time, tending to delay the convergence in international income differences. The model is also capable of explaining some of the observed diversity in the growth pattern of transitional economies. According to the model, this diversity may be the result of variability in adoption costs over time, or the relative position of a transitional economy in the world income distribution. In the more general case of the model with household specific adoption costs, negative growth rates during the transitional process are also possible. The model’s prediction that inequality has negative impact on technology adoption is supported by empirical evidence based on a cross country data set.
    Keywords: inequality, technology adoption, international income differences, altruism, negative growth rates
    Date: 2007–04–20
  7. By: Paul Pichler
    Abstract: We show that redistributive tax and transfer systems have a distortionary e®ect and an insurance e®ect, if agents face idiosyncratic uninsurable earnings risk. These two e®ects imply that redistributive taxes decrease both mean consumption and the standard deviation of consumption. Using household data, we construct an `income compression' measure of the redistributiveness of the tax system and empirically test for the presence of these two e®ects by exploiting di®erences in US state taxes. We ¯nd that tax redistributiveness explains much of the variation in the mean and standard deviation of the within-state consumption distributions over the US. This provides evidence for the presence of both distortionary and insurance e®ects of redistributive taxes and transfers.
    JEL: C68 E47 E52
    Date: 2007–03
  8. By: Kirdan Lees; Troy Matheson; Christie Smith
    Abstract: We evaluate the performance of an open economy DSGE-VAR model for New Zealand along both forecasting and policy dimensions. We show that forecasts froma DSGE-VAR and a "vanilla" DSGE model are competitive with, and in some dimensions superrior to, the Reserve Bank of New Zealand's official forecasts. We also use the estimated DSGE-VAR structure to identify optimal policy rules that are consistent with the Reserve bank's Policy Targets Agreement. Optimal policy rules under parameter certainty prove to be relatively similar to the certainty case. The optimal policies react aggressively to inflation and contain a large degree of interest rate smoothing, but place a low weight on responding to output or the change in the nominal exchange rate.
    JEL: C51 E52 F41
    Date: 2007–01
  9. By: Yves Zenou (Research Institute of Industrial Economics, GAINS, CEPR and IZA)
    Abstract: We develop a standard search-matching model in which mobility costs are so high that it is too costly for workers to relocate when a change in their employment status occurs. We show that, in equilibrium, wages increase with distance to jobs and commuting costs because firms need to compensate the transportation cost difference between the employed and unemployed workers at each location in the city. We also show that the equilibrium land rent is negatively affected by the unemployment benefit because an increase in the latter induce firms to create less jobs, which, in turn, reduces the competition in the land market. We then use this model to provide a mechanism for the observed spatial mismatch between where black workers live and where jobs are. Because blacks and whites differ by their contact rate, we show that the former reside far away from jobs, have higher unemployment rates and lower wages. This is because the housing market amplifies the negative effects of the labor market by creating additional frictions.
    Keywords: search frictions, spatial frictions, efficiency, spatial mismatch hypothesis
    JEL: D83 J15 J64 R14
    Date: 2007–04
  10. By: Yves Zenou (Research Institute of Industrial Economics, GAINS, CEPR and IZA)
    Abstract: We propose a spatial search-matching model where both job creation and job destruction are endogenous. Workers are ex ante identical but not ex post since their job can be hit by a technological shock, which decreases their productivity. They reside in a city and commuting to the job center involves both pecuniary and time costs. Thus, workers with high wages are willing to live closer to jobs to save on time commuting costs. We show that, in equilibrium, there is a one-to-one correspondence between the productivity space and the urban location space since high-productivity workers bid away low-productivity workers in order to occupy locations close to jobs. We also show that in the bargaining process, there is a spatial element in the wage setting since firms need to compensate workers for their spatial costs. Compared to the non-spatial model, the unemployment rate and the reservation productivity are lower and the job-creation rate is higher because the urban space through commuting costs and land rent create additional frictions in the labor market.
    Keywords: job search, commuting costs, wage distribution, urban land use
    JEL: D83 J41 J64 R14
    Date: 2007–03
  11. By: Fabbri, Giorgio; Faggian, Silvia; Gozzi, Fausto
    Abstract: In this paper a family of optimal control problems for economic models is considered, whose state variables are driven by Delay Differential Equations (DDE's). Two main examples are illustrated: an AK model with vintage capital and an advertising model with delay e ect. These problems are very di cult to treat for three main reasons: the presence of the DDE's, that makes them ifinite dimensional; the presence of state constraints; the presence of delay in the control. The purpose here is to develop, at a first stage, the Dynamic Programming approach for this family of problems. The Dynamic Programming approach has been already used for similar problems in cases when it is possible to write explicitly the value function V (Fabbri and Gozzi, 2006). The cases when the explicit form of V cannot be found, as most often occurs, are those treated here. The basic setting is carefully described and some first results on the solution of the Hamilton-Jacobi-Bellman (HJB) equation are given, regarding them as a first step to nd optimal strategies in closed loop form.
    JEL: C61
    Date: 2006
  12. By: Alison Booth; Facundo Sepulveda
    Abstract: We study the joint determination of fertility subsidies and Social Security taxes in an overlapping generations model where agents are heterogeneous in endowments. In equilibria where Social Security is valued, old and poor young agents form a coalition that sustains Social Security. When voting for fertility subsidies, the young take into account both the deadweight loss of such subsidies and the gains from a higher future tax base. They also take into account a third effect of increasing population growth: that of a decrease in future Social Security benefits as a consequence of a change in the identity of the future decisive voter.
    JEL: E62 H2 H30 H55 J13 J14
    Date: 2007–03
  13. By: CARRILLO, Julio; FÈVE, Patrick; MATHÉRON, Julien
    JEL: L52 E31 E32 E52
    Date: 2007–02

This nep-dge issue is ©2007 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.