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on Dynamic General Equilibrium |
| By: | Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L |
| Abstract: | This paper develops an analytical framework to study consumption and labour supply in a rich class of heterogeneous-agent economies with partial insurance. The environment allows for trade in non-contingent and state-contingent bonds, for permanent and transitory idiosyncratic productivity shocks, and for permanent preference heterogeneity and idiosyncratic preference shocks. Exact closed-form solutions are obtained for equilibrium allocations and for the first and second moments of the equilibrium joint distribution over wages, hours and consumption. With these expressions in hand, we show that all the structural preference and risk parameters in the model can be identified, even when productivity risk varies over time, given panel data on wages and hours, and cross-sectional data on consumption. We estimate the model on CEX and PSID data for the U.S. economy over the period 1967-1996. We then use the estimated parameter values to decompose inequality in all variables of interest, both over the life-cycle and across time, into cross-sectional variation in preferences, uninsurable wage risk, insurable wage risk, and measurement error. |
| Keywords: | consumption; incomplete markets; inequality; labour supply; partial insurance |
| JEL: | D31 D52 D58 D91 E62 G12 J22 J31 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6280&r=dge |
| By: | David R. Stockman (Department of Economics,University of Delaware) |
| Abstract: | I extend the Atkeson and Kehoe (1999) putty-clay model to include elastic labor supply and more general forms of technology to explore the impact of oil shocks on the macroeconomy. In particular, I am interested in (1) how this extension affects their results with regard to permanent changes in the price of oil, (2) a comparison of the business cycle properties of the putty-putty and putty-clay models, and (3) whether or not this extended putty-clay model is subject to the Rotemberg and Woodford (1996) critique of the standard perfectly competitive real business cycle model with energy. Results are reported for a wide range of parameter values illustrating that (1) contrary to the Atkeson-Kehoe result, the response of output and capital to permanent changes in the price of oil is identical in both the putty-putty and putty-clay models and is sensitive to the elasticity of substitution between capital services and labor, (2) there are stark differences in several business cycle features, namely the volatility of energy use and the correlations of output with consumption, investment and hours, and (3) the Rotemberg-Woodford critique applies to the putty-clay model revealing both amplification and timing problems. |
| Keywords: | energy, putty-clay, dynamic general equilbrium |
| JEL: | E32 Q43 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:06-15&r=dge |
| By: | Fatih Guvenen; Burhanettin Kuruscu |
| Abstract: | In this paper we present an analytically tractable overlapping generations model of human capital accumulation, and study its implications for the evolution of the U.S. wage distribution from 1970 to 2000. The key feature of the model, and the only source of heterogeneity, is that individuals differ in their ability to accumulate human capital. Therefore, wage inequality results only from differences in human capital accumulation. We examine the response of this model to skill-biased technical change (SBTC) theoretically. We show that in response to SBTC, the model generates behavior consistent with several features of the U.S. data including (i) a rise in overall wage inequality both in the short run and long run, (ii) an initial fall in the education premium followed by a strong recovery, leading to a higher premium in the long run, (iii) the fact that most of this fall and rise takes place among younger workers, (iv) a rise in within-group inequality, (v) stagnation in median wage growth (and a slowdown in aggregate labor productivity), and (vi) a rise in consumption inequality that is much smaller than the rise in wage inequality. These results suggest that the heterogeneity in the ability to accumulate human capital is an important feature for understanding the effects of SBTC, and interpreting the transformation that the U.S. economy has gone through since the 1970's. |
| JEL: | E21 E24 J24 J31 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13096&r=dge |
| By: | Thomas Seegmuller (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]) |
| Abstract: | In past years, imperfect competition has been introduced in several dynamic models to show how mark-up variability, increasing returns (decreasing marginal cost) and monopoly profits affect the occurence of endogenous fluctuations. In this paper, we focus on another possible feature of imperfectly competitive economies : consumers' taste for variety due to endogenous product diversity. introducing monopolistic competition (Dixit and Stiglitz (1977), Benassy (1996)) in an overlapping generations model where consumers have taste for variety, we show that local indeterminacy can occur under the three following conditions : a high substitution between capital and labor, increasing returns arbitrarily small and a not too elastic labor supply. The key mechanism for this result is based on the fact that, due to taste for variety, the aggregate price decreases with the pro-cyclical product diversity which has a direct influence on the real wage and the real interest rate. |
| Keywords: | Endogenous fluctuations, taste for variety, imperfect competition. |
| Date: | 2007–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00143424_v1&r=dge |
| By: | Julien Prat (University of Vienna and IZA) |
| Abstract: | We construct and estimate by maximum likelihood an equilibrium search model where wages are set by Nash bargaining and idiosyncratic productivity follows a geometric Brownian motion. The proposed framework enables us to endogenize job destruction and to estimate the rate of learning-by-doing. Although the range of the observations is not independent of the parameters, we establish that the estimators satisfy asymptotic normality. The structural model is estimated using Current Population Survey data on accepted wages and employment durations. We show that it captures almost perfectly the joint distribution of wages and job spells. We find that the rate of learning-by-doing has an important positive effect on aggregate output and a small impact on employment. |
| Keywords: | job search, human capital, uncertainty, structural estimation |
| JEL: | J31 J64 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2780&r=dge |
| By: | Fatih Guvenen; Burhanettin Kuruscu |
| Abstract: | In this paper, we construct a parsimonious overlapping generations model of human capital accumulation, and study its quantitative implications for the evolution of the U.S. wage distribution from 1970 to 2000. One of the key features of the model is that individuals differ in their ability to accumulate human capital, which is the main source of wage inequality in this model. We examine the response of this model to skill-biased technical change (SBTC), which is modeled as an increase in the trend growth rate of the price of human capital starting in early 1970's. Due to the heterogeneity in ability and age, the responses of different individuals to SBTC are systematically different from each other, generating rich behavior in the evolution of relative wages. We consider different scenarios regarding how individuals' expectations evolve during SBTC. Specifically, we study the case where individuals immediately realize the advent of SBTC (perfect foresight); and the case where they initially underestimate the future growth of the price of human capital (pessimistic priors), but learn the truth in a Bayesian fashion over time. Lack of perfect foresight appears to have little effect on the main results of the paper. The model is quantitatively consistent with several trends including the rise in overall wage inequality; the fall and rise in the college premium; the rise in within-group inequality; the stagnation in median wage growth, and the small rise in consumption inequality despite the large rise in wage inequality. Overall, the model shows promise for explaining disparate trends in the evolution of the wage distribution in a unifying human capital framework. |
| JEL: | E21 E25 J24 J31 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13095&r=dge |
| By: | Patrick J. Kehoe; Virgiliu Midrigan |
| Abstract: | In the data, a sizable fraction of price changes are temporary price reductions referred to as sales. Existing models include no role for sales. Hence, when confronted with data in which a large fraction of price changes are sales related, the models must either exclude sales from the data or leave them in and implicitly treat sales like any other price change. When sales are included, prices change frequently and standard sticky price models with this high frequency of price changes predict small effects from money shocks. If sales are excluded, prices change much less frequently and a standard sticky price model with this low frequency of price changes predict much larger effects of money shocks. This paper adds a motive for sales in a parsimonious extension of existing sticky price models. We show that the model can account for most of the patterns of sales in the data. Using our model as the data generating process, we evaluate the existing approaches and find that neither well approximates the real effects of money in our economy in which sales are explicitly modeled. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:652&r=dge |
| By: | David Andolfatto (Simon Fraser University) |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp07-01&r=dge |
| By: | André Kurmann; Nicolas Petrosky-Nadeau |
| Abstract: | We build a Dynamic General Equilibrium model with search frictions for the allocation of physical capital and investigate its implications for the business cycle. While the model is in principle capable of generating substantial internal propagation to small exogenous shocks, the quantitative effects are modest once we calibrate the model to fit firm-level capital flows. We then extend the model with credit market frictions that lead to countercyclical default and countercyclical risk premia as in the data. Countercyclical default directly affects capital reallocation and has important general equilibrium income effects on labor supply. Yet, for calibrations in line with observed consumption dynamics, we find that even in this extended model, search frictions in physical capital markets play only a small role for business cycle fluctuations. |
| Keywords: | Capital allocation frictions, search and matching, credit frictions, business cycles, dynamic general equilibrium |
| JEL: | E22 E32 E44 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0712&r=dge |