nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒06‒18
nine papers chosen by
Christian Zimmermann
University of Connecticut

  1. Intergenerational Risksharing and Equilibrium Asset Prices By John Y. Campbell; Yves Nosbusch
  2. Absorption in Human Capital and R&D Effects in an Endogenous Growth Model By Sequeira, Tiago Neves
  3. Demographic Change, Relative Factor Prices, International Capital Flows, and Their Differential Effects on the Welfare of Generations By Alexander Ludwig; Dirk Krueger; Axel H. Boersch-Supan
  4. On the aggregate effects of immigration in Spain By Mario Izquierdo; Juan F. Jimeno; Juan A. Rojas
  5. Transitional Dynamics of an Endogenous Growth Model with an Erosion Effect By Sequeira, Tiago Neves
  6. Public Education Expenditure, Growth and Welfare By Konstantinos Angelopoulos; Jim Malley; Apostolis Philippopoulos
  7. How Structural Are Structural Parameters? By Jesús Fernández-Villaverde; Juan F. Rubio-Ramírez
  8. Fair Wages, Fair Prices, and Monetary Policy By Cenesiz, Alper
  9. Portfolio Choices with Near Rational Agents: A Solution to Some International-Finance Puzzles By Pierpaolo Benigno

  1. By: John Y. Campbell; Yves Nosbusch
    Abstract: In the presence of overlapping generations, markets are incomplete because it is impossible to engage in risksharing trades with the unborn. In such an environment the government can use a social security system, with contingent taxes and benefits, to improve risksharing across generations. An interesting question is how the form of the social security system affects asset prices in equilibrium. In this paper we set up a simple model with two risky factors of production: human capital, owned by the young, and physical capital, owned by all older generations. We show that a social security system that optimally shares risks across generations exposes future generations to a share of the risk in physical capital returns. Such a system reduces precautionary saving and increases the risk-bearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, lowers the price of physical capital, and reduces the risk premium on physical capital.
    Date: 2007–02
  2. By: Sequeira, Tiago Neves
    Abstract: Until now, in models of endogenous growth with physical capital, human capital and R&D such as in Arnold [Journal of Macroeconomics 20 (1998)] and followers, steady-state growth is independent of innovation activities. We introduce absorption in human capital accumulation and describe the steady-state and transition of the model. We show that this new feature provides an effect of R&D in growth, consumption and welfare. We compare the quantitative effects of R&D productivity with the quantitative effects of Human Capital productivity in wealth and welfare.
    Date: 2007
  3. By: Alexander Ludwig; Dirk Krueger; Axel H. Boersch-Supan
    Abstract: Demographic change has differential impacts on the welfare of current and future generations. In a simple closed economy, aging -- a relative scarcity of young workers -- increases wages, increasing the welfare of the young. At the same time, population aging will reduce rates of return to capital, thereby reducing the welfare of asset holders who are usually older than the population average. In a global world with pension systems, however, these effects are less straightforward, since international capital flows dampen the factor price changes. Moreover, pay-as-you-go pension systems financed by payroll taxes create a wedge between net and gross wages, and their intergenerational redistribution has important additional effects on the welfare of generations. To quantify these effects, we develop a large-scale multi-country overlapping generations model with uninsurable labor productivity and mortality risk. Due to the predicted relative abundance of the factor capital, the rate of return falls between 2005 and 2050 by roughly 90 basis points. Our simulations indicate that capital flows from rapidly ageing regions to the rest of the world will initially be substantial, but that trends are reversed when households de-cumulate savings. In terms of welfare, our model suggests that young individuals with little assets and currently low labor productivity indeed gain from higher wages associated with population aging. Older, asset-rich households tend to loose because of the predicted decline in real returns to capital.
    JEL: C68 D33 E17 E25
    Date: 2007–06
  4. By: Mario Izquierdo (Banco de España); Juan F. Jimeno (Banco de España; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)); Juan A. Rojas (Banco de España)
    Abstract: This paper presents a dynamic general equilibrium model designed to compute the aggregate impact of immigration, accounting for relevant supply and demand effects. We calibrate the model to the Spanish economy, allowing for enough heterogeneity in the demographic characteristics of immigrant and native workers. We consider an initial steady state characterized by the age structure of the Spanish population in 1995 and study the effects of several immigration scenarios on several macroeconomic variables (GDP, employment, productivity, etc.).
    Keywords: immigration, general equilbrium models
    JEL: E10 F22
    Date: 2007–06
  5. By: Sequeira, Tiago Neves
    Abstract: The convergence features of an Endogenous Growth model with Physical capital, Human Capital and R&D have been studied. We add an erosion effect (supported by empirical evidence) to this model, and fully characterize its convergence properties. The dynamics is described by a fourth-order system of differential equations. We show that the model converges along a one-dimensional stable manifold and that its equilibrium is saddle-path stable. We also argue that one of the implications of considering this “erosion effect” is the increase in the adherence of the model to data.
    Date: 2007
  6. By: Konstantinos Angelopoulos; Jim Malley; Apostolis Philippopoulos
    Abstract: In this paper we study the quantitative macroeconomic effects of public education spending in USA for the post-war period. Using comparable measures of human and physical capital, from Jorgenson and Fraumeni (1989, 1992a,b), we calibrate a standard dynamic general equilibrium model where human capital is the engine of long-run endogenous growth and government education spending is justified by externalities in human capital. Our base calibration, based on moderate sized human capital externalities, suggests that public spending on education is both growth and welfare promoting. However, given that pubic education spending crowds-out private consumption, the welfare maximising size of the government is less than the growth maximising one. Our results further suggest that welfare gains, as high as four percent of consumption, are obtainable if the composition of public spending can be altered in favour of education spending relative to the other components of total government spending.
    Date: 2007–06
  7. By: Jesús Fernández-Villaverde; Juan F. Rubio-Ramírez
    Abstract: This paper studies how stable over time are the so-called "structural parameters" of dynamic stochastic general equilibrium (DSGE) models. To answer this question, we estimate a medium-scale DSGE model with real and nominal rigidities using U.S. data. In our model, we allow for parameter drifting and rational expectations of the agents with respect to this drift. We document that there is strong evidence that parameters change within our sample. We illustrate variations in the parameters describing the monetary policy reaction function and in the parameters characterizing the pricing behavior of firms and households. Moreover, we show how the movements in the pricing parameters are correlated with inflation. Thus, our results cast doubts on the empirical relevance of Calvo models.
    JEL: C11 C15 E10 E32
    Date: 2007–06
  8. By: Cenesiz, Alper
    Abstract: Empirical research on inflation and output dynamics has revealed that inflation lags output following a shock to monetary policy. To account for this fact, researchers rely on price and wage setting assumptions that are not in line with the stylized facts of wage and price setting behavior. Fair wages and fair prices, however, can explain the observed wage and price setting behavior. Hence, I develop and analyze a general-equilibrium model with fair wages and fair prices. The model can explain the observed lag-lead relation between inflation and output. Furthermore, results with respect to other key macroeconomic aggregates are also in line with their empirical counterparts.
    Keywords: Inflation dynamics; Price adjustment; Efficiency wages; Monetary policy.
    JEL: E32 E52 E31
    Date: 2007–05
  9. By: Pierpaolo Benigno
    Abstract: A dynamic model of consumption and portfolio decisions is analyzed in which agents seek robust choices against some misspecification of the model probability distribution. This near-rational environment can at the same time explain an imperfect international portfolio diversification and break the link between cross-country consumption correlation and real exchange rate as it is usually implied by standard preference specifications. Portfolio decisions imply moment restrictions on asset prices that are useful to extract information on the degree of near-rationality present in the data.
    JEL: F41 G11 G15
    Date: 2007–06

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