nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒04‒28
seventeen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Understanding the puzzling effects of technology shocks By Pengfei Wang; Yi Wen
  2. Vintage Capital in the AK growth model: a Dynamic Programming approach By Fabbri, Giorgio; Gozzi, Fausto
  3. Business Cycle Fluctuations and the Life Cycle: How Important is Learning by Doing? (with Selo Imrohoroglu) By Gary D. Hansen
  4. The Future of Social Security By Gonzalez-Eiras, Martin; Niepelt, Dirk
  5. Consumer confidence, endogenous growth and endogenous cycles By Gomes, Orlando
  6. The Beveridge Curve By Yashiv, Eran
  7. Social Security Privatization with Income-Mortality Correlation By Shinichi Nishiyama; Kent Smetters
  8. Decentralized allocation of human capital and nonlinear growth By Gomes, Orlando
  9. Transition démographique, chômage involontaire et redistribution intergénérationnelle : simulations dans un cadre d'équilibre général à générations imbriquées. By Mouez Fodha; Patricia Le Maitre
  10. Deterministic randomness in a model of finance and growth By Gomes, Orlando
  11. Mortgage Markets, Collateral Constraints, and Monetary Policy: Do Institutional Factors Matter? By Calza, Alessandro; Monacelli, Tommaso; Stracca, Livio
  12. Constraints on credit, consumer behaviour and the dynamics of wealth By Gomes, Orlando
  13. On the allocation of credit and aggregate fluctuations By Gomes, Orlando
  14. Consumption, Retirement, and Social Security: Evaluating the Efficiency of Reform with a Life-Cycle Model By John P. Laitner; Daniel Silverman
  15. Anticipated Shocks in Continuous-time Optimization Models: Theoretical Investigation and Numerical Solution By Trimborn, Timo
  16. Time consistent monetary policy with endogenous price rigidity By Henry E. Siu
  17. Holdup, Search and Inefficiency By Shingo Ishiguro

  1. By: Pengfei Wang; Yi Wen
    Abstract: Under aggregate technology shocks, both aggregate inputs and sectorial inputs decline initially and then rise permanently. However, under sector-specific technology shocks, sectorial inputs decline permanently. In addition, sectorial output is very responsive to aggregate technology shocks but not so to sector-specific technology shocks. We show that a flexible-price RBC model with firm entry and exit is consistent with these stylized facts.
    Date: 2007
  2. By: Fabbri, Giorgio; Gozzi, Fausto
    Abstract: This paper deals with an endogenous growth model with vintage capital and, more precisely, with the AK model proposed in [13]. In endogenous growth models the introduction of vintage capital allows to explain some growth facts but strongly increases the mathematical difficulties. So far, in this approach, the model is studied by the Maximum Principle; here we develop the Dynamic Programming approach to the same problem by obtaining sharper results and we provide more insight about the economic implications of the model. We explicitly find the value function, the closed loop formula that relates capital and investment, the optimal consumption path and the long run equilibrium. The short run fluctuations of capital and investment and the relations with the standard AK model are analyzed.
    Keywords: Endogenous growth; Vintage capital; AK model; Dynamic programming.
    JEL: C61 O4
    Date: 2006
  3. By: Gary D. Hansen
  4. By: Gonzalez-Eiras, Martin; Niepelt, Dirk
    Abstract: We analyze the effect of the projected demographic transition on the political support for social security, and equilibrium outcomes. Embedding a probabilistic-voting setup of electoral competition in the Diamond (1965) OLG model, we find that intergenerational transfers arise in the absence of altruism, commitment, or trigger strategies. Closed-form solutions predict population ageing to lead to higher social security tax rates, a rising share of pensions in GDP, but eventually lower social security benefits per retiree. The response of equilibrium tax rates to demographic shocks reduces old-age consumption risk. Calibrated to match features of the U.S. economy, the model suggests that, in response to the projected demographic transition, social security tax rates will gradually increase to 16 percent; other policies that distort labour supply will become less important; and in contrast with frequently voiced fears, labour supply therefore will rise.
    Keywords: labour supply; Markov perfect equilibrium; probabilistic voting; saving; social security
    JEL: E62 H55
    Date: 2007–04
  5. By: Gomes, Orlando
    Abstract: Endogenous growth models are generally designed to address long term trends of growth. They explain how the economy converges to or diverges from a balanced growth path and they characterize aggregate behaviour given the optimization problem faced by a representative agent that maximizes consumption utility. In such frameworks, only potential output matters and all decisions, by firms and households, are taken assuming that any output gap does not interfere with the agents’ behaviour. In this paper, we develop growth models (without and with optimization) that depart from the conventional framework in the sense that consumption decisions take into account output fluctuations. Households will raise their propensity to consume in periods of expansion and they will lower it in phases of recession. Such a framework allows to introduce nonlinear features into the model, making it feasible to obtain, for reasonable parameter values, endogenous fluctuations. These are triggered by a Neimark-Sacker bifurcation.
    Keywords: Endogenous growth; Endogenous business cycles; Nonlinear dynamics; Neimark-Sacker bifurcation.
    JEL: C61 O41 E32
    Date: 2007–01
  6. By: Yashiv, Eran
    Abstract: The Beveridge curve depicts a negative relationship between unemployed workers and job vacancies, a robust finding across countries. The position of the economy on the curve gives an idea as to the state of the labour market. The modern underlying theory is the search and matching model, with workers and firms engaging in costly search leading to random matching. The Beveridge curve depicts the steady state of the model, whereby inflows into unemployment are equal to the outflows from it, generated by matching.
    Keywords: Beveridge curve; matching; search; unemployment; vacancies
    JEL: E24 J63 J64
    Date: 2007–04
  7. By: Shinichi Nishiyama (Georgia State University); Kent Smetters (The Wharton School)
    Abstract: While privatizing Social Security can improve labor supply incentives, it can also reduce risk sharing. We simulate a 50-percent privatization using an overlapping-generations model where heterogeneous agents with elastic labor supply face idiosyncratic earnings shocks and longevity uncertainty. When wage shocks are insurable, privatization produces about $30,100 of extra resources for each future household after all transitional losses have been paid. When wages are not insurable, privatization reduces efficiency by about $8,100 per future household. We check the robustness of these results to different model specifications as well as policy reforms and arrive at several surprising conclusions. First, privatization performs better in a closed economy, where interest rates decline with capital accumulation, than in an open economy. Second, privatization also performs better when an actuarially-fair private annuity market does not exist. Third, government matching of private contributions on a progressive basis is not very effective at restoring efficiency and can actually harm.
    Date: 2006–11
  8. By: Gomes, Orlando
    Abstract: The standard two-sector growth model with physical and human capital characterizes a process of material accumulation involving simple dynamics; constant long run growth is observable when assuming conventional Cobb-Douglas production functions in both sectors. This framework is developed under a central planner scenario: it is a representative agent that chooses between consumption and capital accumulation, on one hand, and between allocating human capital to each one of the two sectors, on the other. We concentrate in this second choice and we argue that the outcome of the aggregate model is incompatible with a scenario where individual agents, acting in a market economy, are free to decide, in each time moment, how to allocate their human capital in order to produce goods or to create additional skills. Combining individual incentives, the effort of a central planner (i.e., government) to approximate the decentralized outcome to the optimal result and a discrete choice rule that governs the decisions of individual agents, we propose a growth framework able to generate a significant variety of long term dynamic results, including endogenous fluctuations.
    Keywords: Endogenous growth; Human capital; Endogenous business cycles; Discrete choice; Nonlinear dynamics; Chaos.
    JEL: C61 O41 E32
    Date: 2007–01
  9. By: Mouez Fodha (Centre d'Economie de la Sorbonne); Patricia Le Maitre (Université de Bretagne Sud)
    Abstract: Pay as-you-go social security schemes will face increasing difficulties in the next few years due to population aging, which results from both extension of life expectancy and sharp decrease in fertility rates. The purpose of this paper is to evaluate within a computable general equilibrium model the consequences of different reforms within an economy with two types of agents : unqualified ones facing unemployment and qualified ones. We show that a mixed reform with two instruments (introduction of a funded pension system and decreasing of benefits) is Pareto-improving in the long term, while damaging welfare distribution. Morerover, simultations show that the increase of the legal retirement age should be up to seven years.
    Keywords: Overlapping generations model, pay as-you-go pension system, ageing population, involuntary unemployment.
    JEL: J11 H55 C68 D91
    Date: 2007–03
  10. By: Gomes, Orlando
    Abstract: Following the literature on growth, cycles and financial development, this paper develops an endogenous growth model where the source of endogenous business cycles relates to the allocation of credit between productive investment and consumption. An important role is given to consumer sentiment, because this determines the willingness of households in terms of demand for credit; in particular, optimistic beliefs about the economy’s macro performance deviate financial resources from investment in favour of consumption. The dynamic analysis indicates that Neimark-Sacker and flip bifurcations eventually separate stable and unstable manifolds, and as a result a region of nonlinear motion is generated: cycles of various periodicities and chaotic motion characterize the behaviour of the long run time paths of accumulated wealth, output and consumption.
    Keywords: Financial development; Endogenous business cycles; Endogenous growth; Credit to consumption; Local bifurcations; Nonlinear dynamics; Chaos.
    JEL: C62 O16 E32
    Date: 2007–02
  11. By: Calza, Alessandro; Monacelli, Tommaso; Stracca, Livio
    Abstract: We study the role of institutional characteristics of mortgage markets in affecting the strength and timing of the effects of monetary policy shocks on house prices and consumption in a sample of OECD countries. With frictionless credit markets, those characteristics should in principle be immaterial for the transmission of monetary impulses. We document three facts: (1) there is significant divergence in the structure of mortgage markets across the main industrialized countries; (2) at the business cycle frequency, the correlation between consumption and house prices increases with the degree of flexibility/development of mortgage markets; (3) the transmission of monetary policy shocks on consumption and house prices is stronger in countries with more flexible/developed mortgage markets. We then build a two-sector dynamic general equilibrium model with price stickiness and collateral constraints, where the ability of borrowing is endogenously linked to the nominal value of a durable asset (housing). We study how the response of consumption to monetary policy shocks is affected by alternative values of three key institutional parameters: (i) down-payment rate; (ii) mortgage repayment rate; (iii) interest rate mortgage structure (variable vs. fixed interest rate). In line with our empirical evidence, the sensitivity of consumption to monetary policy shocks increases with lower values of (i) and (ii), and is larger under a variable-rate mortgage structure.
    Keywords: collateral constraint; house prices; monetary policy; mortgage markets
    JEL: E21 E44 E52
    Date: 2007–04
  12. By: Gomes, Orlando
    Abstract: This note develops a simple macro model where the pattern of wealth accumulation is determined by a credit multiplier and by the way households react to short run fluctuations. In this setup, long term wealth dynamics are eventually characterized by the presence of endogenous cycles.
    Keywords: Credit constraints; Financial development; Consumer confidence; Endogenous business cycles; Nonlinear dynamics.
    JEL: C61 O41 E32
    Date: 2007–01
  13. By: Gomes, Orlando
    Abstract: Recent literature on financial development and growth has highlighted the possibility of endogenous business cycles arising for particular levels of a given credit multiplier. These studies concentrate on loans directed to the productive activity and neglect the role of credit to consumption. In this note, we consider an endogenous growth model, where a representative agent must choose how to allocate credit; basically, the agent considers a simple rule where the share of credit to consumption reacts to deviations of the consumption – wealth ratio relatively to the corresponding steady state level. The setup generates nonlinear dynamics, which are analyzed both locally and globally.
    Keywords: Financial development; Credit to consumption; Endogenous growth; Endogenous cycles; Nonlinear dynamics.
    JEL: C61 O16 E32
    Date: 2007–03
  14. By: John P. Laitner (University of Michigan); Daniel Silverman (University of Michigan)
    Abstract: This paper analyzes the effect of a potential reform to the Social Security system on individuals’ retirement and consumption choices. We first estimate the coefficients for a life-cycle model. We assume intratemporally nonseparable preference orderings and endogenous retirement. Our framework allows the possibility of disability. The specification predicts a change in consumption at retirement; we use the empirical magnitude of the change, together with desired retirement age, to identify key parameters such as the curvature of the utility function. We then qualitatively and quantitatively study the possible long-run effect of a Social Security reform in which individuals no longer face the OASI payroll tax after some specified age, and their subsequent earnings have no bearing on their Social Security benefits. Simulations indicate that retirement ages would rise by as much as one year, equivalent variations could average $5000 (1984 dollars) per household or more, and reform could generate $2500 or more additional income tax revenue per household.
    Date: 2006–11
  15. By: Trimborn, Timo
    Abstract: We derive the well-known continuity principle for adjoint variables for preannounced or anticipated changes in parameters for continuous-time, infinite-horizon, perfect foresight optimization models. For easy and intuitive numerical computation of the resulting multi point boundary value problem we suggested to simulate the resulting differential algebraic system representing the first order conditions. By ensuring that the state variables and the adjoint variables are continuous, potential jumps in the control variables are calculated automatically. This can be easily conducted with the relaxation algorithm as proposed by Trimborn et al. (2007). We solve a Ramsey model extended by an elementary Government sector numerically. Simulations of a preannounced increase in the consumption tax show a qualitative different pattern depending on the intertemporal elasticity of substitution.
    Keywords: anticipated shocks; continuous-time optimization; numerical solution
    JEL: C61 C63 O40
    Date: 2007–04
  16. By: Henry E. Siu
    Abstract: I characterize time consistent equilibrium in an economy with price rigidity and an optimizing monetary authority operating under discretion. Firms have the option to increase their frequency of price change, at a cost, in response to higher inflation. Previous studies, which assume a constant degree of price rigidity across inflation regimes, find two time consistent equilibria—one with low inflation, the other with high inflation. In contrast, when price rigidity is endogenous, the high inflation equilibrium ceases to exist. Hence, time consistent equilibrium is unique. This result depends on two features of the analysis: (1) a plausible quantitative specification of the fixed cost of price change, and (2) the presence of an arbitrarily small cost of inflation that is independent of price rigidity.
    Keywords: Monetary policy
    Date: 2007
  17. By: Shingo Ishiguro (Graduate School of Economics, Osaka University)
    Abstract: This paper investigates the holdup problem in the dynamic search market where buyers and sellers search for their trading partners and specific investments are made after match but before trade. We show that frictionless (competitive) market imposes severe limitations on attainable efficiencies: Markets with small friction make the holdup problem more serious than those with large friction because in any equilibrium, whether stationary or non-stationary, investment must be dropped down to the minimum level and trade must be delayed with positive probability.
    Keywords: Delay of Trade, Holdup Problem, Search
    JEL: C72 C78
    Date: 2007–05

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