nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒06‒11
fifteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Monetary Policy with Liquidity Frictions By Oscar Mauricio VALENCIA A.
  2. Dynamic Stochastic General Equilibrium (DSGE) Priors for Bayesian Vector Autoregressive (BVAR) Models: DSGE Model Comparison By Theodoridis, Konstantinos
  3. Information criteria for impulse response function matching estimation of DSGE models By Alastair Hall; Atsushi Inoue; James M. Nason; Barbara Rossi
  4. Business Cycle and Bank Capital: Monetary Policy Transmission under the Basel Accords By Alvaro Aguiar; Ines Drumond
  5. Real business cycle dynamics under first-order risk aversion By Jim Dolmas
  6. Estate Taxation, Entrepreneurship, and Wealth By Marco Cagetti; Mariacristina De Nardi
  7. Socially determined time preference in discrete time By Gomes, Orlando
  8. Revisiting the Supply-Side Effects of Government Spending Under Incomplete Markets By George-Marios Angeletos; Vasia Panousi
  9. Investment Spikes: New Facts and a General Equilibrium Exploration By Francois Gourio; Anil K Kashyap
  10. Euro area inflation persistence in an estimated nonlinear DSGE model. By Gianni Amisano; Oreste Tristani
  12. Population Growth and Local Home Environment Externality in an Endogenous Growth Model with Two Engines of Growth By Shirou Kuwahara; Katsunori Yamada
  13. When leisure becomes excessive: a bifurcation result in endogenous growth theory By Gomes, Orlando
  14. Sectoral Shift, Wealth Distribution, and Development By Yuki, Kazuhiro
  15. Offshoring and Unemployment By Devashish Mitra; Priya Ranjan

  1. By: Oscar Mauricio VALENCIA A.
    Abstract: This paper explores the welfare efects of a reduction in the inflation rates in an environment of incomplete markets. We built a dynamic heterogeneous agent model that features idiosyncratic risks in the labor supply and liquidity frictions. The model shows that a disinflation policy results in an income reallocation among debtors and lenders. The changes in the capital returns conveys variations in the precautionary savings and hence, an intertemporal redistribution of wealth and income. The welfare implications are develop according to the incomplete market features and the money plays a role of smoothing consumption when the agents faces income variability without state contingent insurance. The model is calibrated for the Colombian economy in such a way that disinflation episodes are replicated. Early results show that the disinflation monetary policy leads to improvements of liquidity in the economy because the money holdings are used by the agents for wealth transfer over time. This paper shows quantitative evidence in which disin°ation facts are associated with increments in the average real money holdings and average consumption. In addition, the volatility of consumption is reduced as the inflation rate falls, while the volatility of money holdings increases (i.e precautionary demand for money balance).
    Date: 2007–02–15
  2. By: Theodoridis, Konstantinos (Cardiff Business School)
    Abstract: This Paper describes a procedure for constructing theory restricted prior distributions for BVAR models. The Bayes Factor, which is obtained without any additional computational effort, can be used to assess the plausibility of the restrictions imposed on the VAR parameter vector by competing DSGE models. In other words, it is possible to rank the amount of abstraction implied by each DSGE model from the historical data.
    Keywords: BVAR; DSGE Model Evaluation; Gibbs Sampling; Bayes Factor
    JEL: C11 C13 C32 C52
    Date: 2007–06
  3. By: Alastair Hall; Atsushi Inoue; James M. Nason; Barbara Rossi
    Abstract: We propose a new information criterion for impulse response function matching estimators of the structural parameters of macroeconomic models. The main advantage of our procedure is that it allows the researcher to select the impulse responses that are most informative about the deep parameters, therefore reducing the bias and improving the efficiency of the estimates of the model’s parameters. We show that our method substantially changes key parameter estimates of representative dynamic stochastic general equilibrium models, thus reconciling their empirical results with the existing literature. Our criterion is general enough to apply to impulse responses estimated by vector autoregressions, local projections, and simulation methods.
    Date: 2007
  4. By: Alvaro Aguiar (CEMPRE, Faculdade de Economia, Universidade do Porto, Portugal); Ines Drumond (CEMPRE, Faculdade de Economia, Universidade do Porto, Portugal)
    Abstract: This paper improves the analysis of the role of financial frictions in the transmission of monetary policy and in business cycle fluctuations, by focusing on an additional channel working through bank capital. Detailing a dynamic general equilibrium model, in which households require a (countercyclical) liquidity premium to hold bank capital, we find that, together with the financial accelerator, the introduction of regulatory bank capital significantly amplifies monetary shocks through a liquidity premium effect on the external finance premium faced by firms. This amplification effect is larger under Basel II than under Basel I regulatory rules. Indeed, introducing bank capital enhances the role of financial frictions in the propagation of shocks, in line with arguments in related literature.
    Keywords: Bank capital channel; Bank capital requirements; Financial accelerator; Liquidity premium; Monetary transmission mechanism; Basel Accords
    JEL: E44 E32 E52 G28
    Date: 2007–06
  5. By: Jim Dolmas
    Abstract: This paper incorporates preferences that display first-order risk aversion (FORA) into a standard real business cycle model. Although FORA preferences represent a sharp departure from the expected utility/constant relative risk aversion (EU/CRRA) preferences common in the business cycle literature, the change has only a negligible e¤ect on the model s second moment implications. In fact, for what I argue is an empirically reasonable "ballpark" calibration of the FORA preferences, the moment implications are essentially identical to those under EU/CRRA, while the welfare cost of aggregate fluctuations in the model is substantially larger.
    Keywords: Business cycles
    Date: 2007
  6. By: Marco Cagetti; Mariacristina De Nardi
    Abstract: We study the effects of abolishing estate taxation in a quantitative and realistic framework that includes the key features that policy makers are worried about: business investment, borrowing constraints, estate transmission, and wealth inequality. We use our model to estimate effective estate taxation. We consider various tax instruments to reestablish fiscal balance when abolishing estate taxation. We find that abolishing estate taxation would not generate large increases in inequality, and would, in some cases, generate increases in aggregate output and capital accumulation. If, however, the resulting revenue shortfall were financed through increased income or consumption taxation, the immensely rich, and the old among those in particular, would experience a welfare gain, at the cost of welfare losses for the vast majority of the population.
    JEL: D31 E21 H2
    Date: 2007–06
  7. By: Gomes, Orlando
    Abstract: The aim of the paper is to develop a discrete time version of a one-sector optimal growth model with endogenous time preference. The intertemporal discount rate is determined by social factors (i.e., factors that are external to the individual agent), namely the economy wide levels of consumption and income. In continuous time, the combined effect of the previous factors is known to eventually produce local indeterminacy, instead of the well known saddle-path equilibrium of the standard Ramsey model. In discrete time, the possibility of local indeterminacy is explored under several types of Ramsey models with endogenous time preference: neo-classical and endogenous growth models, and models with production externalities and endogenous labor supply. Besides finding various possibilities regarding local dynamics, we also find that one of the models can give place to endogenous fluctuations, although this occurs only under rather exceptional circumstances.
    Keywords: Endogenous time preference; Growth models; Stability analysis; Technological externalities; Endogenous labor supply.
    JEL: C61 O41
    Date: 2007–06
  8. By: George-Marios Angeletos; Vasia Panousi
    Abstract: This paper revisits the macroeconomic effects of government consumption in the neoclassical growth model augmented with idiosyncratic investment (or entrepreneurial) risk. Under complete markets, a permanent increase in government consumption has no long-run effect on the interest rate, the capital-labor ratio, and labor productivity, while it increases work hours due to the familiar negative wealth effect. These results are upset once we allow for incomplete markets. The very same negative wealth effect now causes a reduction in risk taking and investment. This in turn leads to a lower risk-free rate and, under certain conditions, also to a lower capital-labor ratio, lower productivity and lower wages.
    JEL: E13 E6 H3
    Date: 2007–05
  9. By: Francois Gourio; Anil K Kashyap
    Abstract: Using plant-level data from Chile and the U.S. we show that investment spikes are highly pro-cyclical, so much so that changes in the number of establishments undergoing investment spikes (the "extensive margin") account for the bulk of variation in aggregate investment. The number of establishments undergoing investment spikes also has independent predictive power for aggregate investment, even controlling for past investment and sales. We re-calibrate the Thomas (2002) model (that includes fixed costs of investing) so that it assigns a prominent role to extensive adjustment. The recalibrated model has different properties than the standard RBC model for some shocks.
    JEL: E22 E32
    Date: 2007–06
  10. By: Gianni Amisano (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Oreste Tristani (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We estimate the approximate nonlinear solution of a small DSGE model on euro area data, using the conditional particle filter to compute the model likelihood. Our results are consistent with previous findings, based on simulated data, suggesting that this approach delivers sharper inference compared to the estimation of the linearised model. We also show that the nonlinear model can account for richer economic dynamics - the impulse responses to structural shocks vary depending on initial conditions selected within our estimation sample. JEL Classification: C11, C15, E31, E32, E52.
    Keywords: DSGE models, inflation persistence, second order approximations, sequential Monte Carlo, Bayesian estimation.
    Date: 2007–05
  11. By: Kazuo Nishimura; John Stachurski
    Abstract: This paper studies a multisector model of commodity markets with storage, solving the representative agent problem and obtaining the corresponding decentralized equilibrium. We describe the dynamics of the model, establishing geometric ergodicity, a Law of Large Numbers and a Central Limit Theorem.
    Date: 2007–03
  12. By: Shirou Kuwahara (Graduate School of Systems and Information Engineering, University of Tsukuba); Katsunori Yamada (Graduate School of Economics, Osaka University)
    Abstract: This paper presents an endogenous growth model with population growth and an inter-generational spillover of human capital: we consider the ``local home environment externality conceptualized by Galor and Tsiddon (1997a). The model will generate a negative relationship between the population growth rate and the per capita GDP growth rate, which is also present in the data. Furthermore, multiple equilibrium paths will result. As far as we know, this is the first paper that derives a multiplicity of steady growth paths in a model with two sources of growth and the Jones technology. The paper also casts a paradox that the GDP growth rate may be higher in the society without the externality than the one in the economy with externality
    Keywords: multiple equilibria; R&D; Jones technology; the local home environment externality
    JEL: O11 O31 O41
    Date: 2007–06
  13. By: Gomes, Orlando
    Abstract: The traditional assumption concerning endogenous labor supply in models of economic growth is that utility increases with leisure, independently of the specific time allocation of the representative agent observed at a given moment. In this note, we explore the consequences, over dynamic stability, of assuming that the agent dislikes having free time in excess, i.e., of considering that the marginal utility of leisure is not necessarily positive for every value of the leisure share (in particular, for high values of this share). By including this assumption in a typical AK endogenous growth model, we find that the system will rest, independently of parameter values, on a bifurcation line.
    Keywords: Labor-leisure choice; Leisure utility; Endogenous growth; Dynamic analysis.
    JEL: C61 O41 J22
    Date: 2007–06
  14. By: Yuki, Kazuhiro
    Abstract: There are two phenomena widely observed when an economy departs from an underdeveloped state and starts rapid economic growth. One is the shift of production, employment, and consumption from the traditional sector to the modern sector, and the other is a large increase in educational levels of its population. The question is why some economies have succeeded in such structural change, but others do not. In order to examine the question, an OLG model that explicitly takes into account the sectoral shift and human capital accumulation as sources of development is constructed. It is shown that, for a successful structural change, an economy must start with a wealth distribution that gives rise to an adequate size of 'middle class'. Once the economy initiates the 'take-off', the sectoral shift and human capital growth continue until it reaches the steady state with high income and equal distribution. However, when the productivity of the traditional sector is low, irrespective of the initial distribution and the productivity of the modern sector, it fails in the sectoral shift and ends up in one of steady states with low income and high inequality. Thus, sufficient productivity of the traditional sector is a prerequisite for development.
    Keywords: Human capital; Sectoral shift; Structural change; Wealth distribution
    JEL: O11 O15
    Date: 2007–05–30
  15. By: Devashish Mitra (Department of Economics, Syracuse University, NBER and IZA); Priya Ranjan (Department of Economics, University of California-Irvine)
    Abstract: In this paper, in order to study the impact of offshoring on sectoral and economywide rates of unemployment, we construct a two sector general equilibrium model in which labor is mobile across the two sectors, and unemployment is caused by search frictions. We find that, contrary to general perception, wage increases and sectoral unemployment decreases due to offshoring. This result can be understood to arise from the productivity enhancing (cost reducing) effect of offshoring. If the search cost is identical in the two sectors, or even if the search cost is higher in the sector which experiences offshoring, the economywide rate of unemployment decreases. We also find multiple equilibrium outcomes in the extent of offshoring and therefore, in the unemployment rate. Furthermore, a firm can increase its domestic employment through offshoring. Also, such a firm's domestic employment can be higher than a firm that chooses to remain fully domestic. When we modify the model to disallow intersectoral labor mobility, the negative relative price effect on the sector in which firms offshore some of their activity becomes stronger. In such a case, it is possible for this effect to offset the positive productivity effect, and result in a rise in unemployment in that sector. In the other sector, offshoring has a much stronger unemployment reducing effect in the absence of intersectoral labor mobility than in the presence of it. Finally, allowing for an endogenous number of varieties provides an additional indirect channel, through which sectoral unemployment goes down due to the entry of new firms brought about by offshoring.
    Keywords: Offshoring; Imperfect competition; Unemployment; Job search; Vacancies
    JEL: F12 F16 J64
    Date: 2007–05

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.