nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒05‒04
six papers chosen by
Christian Zimmermann
University of Connecticut

  1. On Stickiness, Cash in Advance, and Persistence By Auray, Stephane; de Blas, Beatriz
  2. Politically Optimal Fiscal Policy By Michael Kumhof; Irina Yakadina
  3. On the Ramsey Equilibrium with heterogeneous consumers and endogenous labor supply By Stéphano Bosi; Thomas Seegmuller
  4. Rebalancing China's Economy: What Does Growth Theory Tell Us? By Jahangir Aziz
  5. How do Capital Controls Affect the Transmission of Foreign Shocks? By Dudley Cooke
  6. Debt Dynamics and Global Imbalances: Some Conventional Views Reconsidered By Guy Meredith

  1. By: Auray, Stephane (Universite Lille 3, GREMARS and CIRPEE, Villeneuve d'Acsq cedex, France); de Blas, Beatriz (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)
    Abstract: This paper shows that a model which combines sticky price and sticky wages with investment in the cash-in-advance constraint generates business cycle dynamics consistent with empirical evidence. The model reproduces the responses of the key macroeconomic variables to technology and money supply shocks. In particular, the model generates enough output and inflation persistence with standard stickiness parameters. This setup is also able to generate the liquidity effect after a money injection, overcoming other standard new Keynesian models.
    Keywords: sticky prices; sticky wages; monetary facts; labor market facts; cash-in-advance
    JEL: E32 E41 E52
    Date: 2007–03
  2. By: Michael Kumhof; Irina Yakadina
    Abstract: Why do governments issue large amounts of debt? In what sense and for whom is such a policy optimal? We show that twisting the optimal taxation paradigm produces very reasonable predictions for debt and real interest rates. Adding an extra dimension of uncertainty about the political planning horizon gives rise to a positive and very plausible government debt-to-GDP ratio of about 55 percent in a model that otherwise predicts negative government debt. We quantify the impact of political uncertainty on steady state and business cycle dynamics. We illustrate how populist tax cuts can cause business cycle fluctuations.
    Keywords: Optimal Fiscal Policy , Incomplete Asset Markets , Political economy , government debt bias , Fiscal policy , Public debt , Gross domestic product , Political economy , Tax changes , Business cycles ,
    Date: 2007–03–29
  3. By: Stéphano Bosi (EQUIPPE - Département d'Economie - [Université des Sciences et Technologie de Lille - Lille I], EPEE - [Université d'Evry-Val d'Essonne]); Thomas Seegmuller (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: In this paper, we address the question of deterministic cycles in a Ramsey model with heterogeneous infinite-lived agents and borrowing constraints, augmented to take into account the case of elastic labor supply. Under usual restrictions, not only we show that the steady state is unique, but also we clarify its stability properties through a local analysis. We find that, in many cases, the introduction of elastic labor supply promotes convergence by widening the range of parameters for saddle-path stability and endogenous cycles can eventually disappear. These results are robustly illustrated by means of canonical examples in which consumers have separable, KPR or homogeneous preferences.
    Keywords: Saddle-path stability, endogenous cycles, heterogeneous agents, endogenous labor supply, borrowing constraint.
    Date: 2007–04–25
  4. By: Jahangir Aziz
    Abstract: This paper uses the standard one-sector neoclassical growth model to investigate why China's consumption has been low and investment high. It finds that the low cost of capital has been quantitatively an important factor. Theory predicts that the price of capital may have been significantly distorted in the 1990s and 2000s. The distortion could have been caused by nonperforming loans, borrowing constraints, and uncertainty over changes in government guidance in bank lending. If China is to rebalance growth towards relying more on consumption and less on exports and investment, banking sector reforms and financial market development could, therefore, turn out to be key.
    Keywords: Business cycle accounting , rebalancing growth , financial distortions , Economic growth , China , Economic policy , Bank reforms , Financial sector , Capital markets , Capital , Consumption , Investment , Exports , Economic models ,
    Date: 2007–01–08
  5. By: Dudley Cooke (University of Essex)
    Abstract: This paper studies the short-run transmission of foreign shocks in a small open economy with capital controls and a fixed exchange rate. Capital controls alter the transmission of shocks because endogenous changes in the domestic nominal interest rate affect savings and investment decisions. The economy's reaction to export shocks hinges on how the government chooses to restrict capital flows; that is, whether inflows or outflows are restricted. For foreign interest rate shocks, private capital flows are important, but so are the government's holdings of foreign exchange reserves. Finally, a simple graphical apparatus is developed to provide a contrast to the case when capital flows are unrestricted.
    Keywords: capital controls; foreign shocks
    JEL: E58 F32 F41
    Date: 2007–04
  6. By: Guy Meredith
    Abstract: We use a general-equilibrium model to explain the rise in global trade and payments imbalances since the mid-1990s, and then to construct adjustment paths to a steady state. Assuming that the shocks giving rise to the imbalances do not suddenly reverse, simulated movements in the U.S. trade deficit and exchange rate are smaller and more gradual than suggested by partial-equilibrium analyses. An important factor reducing the size of the adjustments is a simulated real interest rate on U.S. external liabilities that is below both the interest rate on external assets and the U.S. real economic growth rate. In addition, the adjustment takes place over an extended period without significantly raising the share of U.S. assets in foreign portfolios, in part because depreciation of the dollar requires continued foreign accumulation of U.S. assets just to keep their portfolio share constant.
    Keywords: Debt dynamics; global imbalances; international adjustment ,
    Date: 2007–01–11

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