nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒06‒23
nineteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Technology Shocks, Statistical Models, and The Great Moderation By Fuentes-Albero, Cristina
  2. Understanding the puzzling effects of technology shocks By Pengfei Wang; Yi Wen
  3. Investment and firm dynamics By D'Erasmo, Pablo
  4. The composition of capital inflows when emerging market firms face financing constraints By Katherine A. Smith; Diego Valderrama
  5. Parental altruism, life expectancy and dynamically inefficient equilibria By d'Albis, Hippolyte; Decreuse, Bruno
  6. Job search with ubiquity and the wage distribution By Decreuse, Bruno; Zylberberg, André
  7. The Convergence Dynamics of a Transition Economy: The Case of the Czech Republic By Jan Bruha; Jiri Podpiera; Stanislav Polak
  8. Job Search, Bargaining, and Wage Dynamics By Shintaro Yamaguchi
  9. Entry and the accumulation of capital: a two state-variable extension to the Ramsey model By Brito, Paulo; Dixon, Huw
  10. Population Growth in a Model of Economic Growth with Human Capital Accumulation and Horizontal R&D By Alberto Bucci
  11. Optimal fiscal and monetary policy with costly wage bargaining By David M. Arseneau; Sanjay K. Chugh
  12. Monetary hyperinflations and money essentiality. By Alexandre Sokic
  13. Addressing the Food Aid Curse By Max Blouin; Stéphane Pallage
  14. The Political Economy of Housing Supply:Homeowners, Workers, and Voters By Francois Ortalo-Magne; Andrea Prat
  15. Coping with Spain's Aging: Retirement Rules and Incentives By Mario Catalán; Jaime Guajardo; Alexander W. Hoffmaister
  16. Over-education for the rich, under-education for the poor: a search-theoretic microfoundation By Charlot, Olivier; Decreuse, Bruno
  17. Choosy search and the mismatch of talents By Decreuse, Bruno
  18. ‘The Father of Child is Father of Man:’ Implications for the Demographic Transition By David de la Croix; Omar Licandro
  19. Small price change response to a large devaluation in a menu cost model By Bruchez, Pierre-Alain

  1. By: Fuentes-Albero, Cristina
    Abstract: In this paper we compare the cyclical features implied by an RBC model with two technology shocks under several statistical specifications for the stochastic processes governing technological change. We conclude that while a trend-stationary model accounts better for the observed volatilities, a difference-stationary model does a relatively better job of accounting for the correlation of the variables of interest with output. We also explore some counterfactuals to assess the ability of our model to replicate the volatility slowdown of the mid 1980s. First, we conclude that the stochastic growth model outperforms the deterministic growth model in accounting for the Great Moderation. Finally, we obtain that even though the neutral technology shock is the main driving force in the volatility slowdown, allowing for a larger financial flexibility in the form of a smaller volatility for the investment-specific innovation improves the ability of our model to account for the magnitude of the Great Moderation.
    Keywords: Business Cycle; Aggregate fluctuations; Technology Shocks; Unit Roots
    JEL: O30 E32 C32
    Date: 2007–06–01
  2. 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.
    Keywords: Business cycles ; Equilibriuim (Economics)
    Date: 2007
  3. By: D'Erasmo, Pablo
    Abstract: In this paper I ask whether a model of ¯rm capital accumulation with entry and exit calibrated to match the investment regularities of U.S. establishments is capable of generating the dependence of ¯rm dynamics on size and age. Firms face uncertainty in the form of idiosyncratic productivity shocks and are subject to non-convex capital adjustment costs. I solve for the stationary equilibrium to show that the model can account for the simultaneous dependence of industry dynamics on size (once we condition on age) and on age (once we condition on size).
    Keywords: firm dynamics; investment; financial constraints
    JEL: D21 G11 E22
    Date: 2006–03
  4. By: Katherine A. Smith; Diego Valderrama
    Abstract: The composition of capital inflows to emerging market economies tends to follow a predictable dynamic pattern across the business cycle. In most emerging market economies, total inflows are procyclical, with debt and portfolio equity flowing in first, followed later in the expansion by foreign direct investment (FDI). To understand the timing of these flows, we use a small open economy (SOE) framework to model the composition of capital inflows as the equilibrium outcome of emerging market firms' financing decisions. We show how costly external financing and foreign direct investment search costs generate a state contingent cost of financing, so that the "cheapest" source of financing depends on the phase of the business cycle. In this manner, the financial frictions are able to explain the interaction between the types of flows and deliver a time varying composition of flows, as well as other standard features of emerging market business cycles. If, as this work suggests, flows are an equilibrium outcome of firms' financing decisions then volatility of capital inflows is not necessarily "bad" for an economy. Furthermore, using capital controls to shut down one type of flow and encourage another is certain to have both long- and short-run welfare implications.
    Keywords: Capital movements ; Emerging markets
    Date: 2007
  5. By: d'Albis, Hippolyte; Decreuse, Bruno
    Abstract: Macrodynamic models with finite lifetime and selfish individuals may feature (dynamically) inefficient equilibria, while models with infinite lifetime and altruistic individuals cannot. Do strong intergenerational altruism and high life expectancy prevent the occurence of inefficient equilibria? To answer this question, we present a continuous time OLG model which generalizes the Blanchard-Buiter-Weil model. Our main innovation relies on the introduction of parental altruism, whose intensity is variable. We show that parental altruism and life expectancy actually favor overaccumulation. Theoretical results are illustrated by a parametrization from US data. Our numerical exercises suggest that the US economy is dynamically inefficient, mainly because life expectancy is sufficiently short.
    Keywords: Overlapping generations model; Productive capital; Dynamic (in)efficiency; Intergenerational altruism
    JEL: D61 D90 E21
    Date: 2007–03
  6. By: Decreuse, Bruno; Zylberberg, André
    Abstract: We propose a search equilibrium model in which homogeneous firms post wages along with a vacancy to attract job-seekers, while homogeneous unemployed workers invest in costly job-seeking. The key innovation relies on the organization of the search market and the search behavior of the job-seekers. The search market is segmented by wage level, and individuals are ubiquitous in the sense they can choose the amount of search effort spent on each (sub-)market. We show that there exists a non-degenerate equilibrium wage distribution. Remarkably, the density of this wage distribution is hump-shaped, and it can be right-tailed. Our results are illustrated by an example originating a Beta wage distribution.
    Keywords: Search effort; Segmented markets; Equilibrium wage dispersion
    JEL: J31 J64 J41 D83
    Date: 2006
  7. By: Jan Bruha; Jiri Podpiera; Stanislav Polak
    Abstract: In this paper we develop a two-country dynamic general equilibrium model by means of which we seek to explain the long-run paths of a converging emerging market economy. We borrow a paradigm from the New Open Economy Macroeconomics literature and amend it to address specific features such as initial asymmetry in development and size of economies as well as different speed of capital accumulation. Using a calibration of productivity and deep parameters for the Czech economy we demonstrate the ability of the model to consistently replicate dynamics in key macroeconomic variables that are essential inputs for commonly used "gap models" in monetary policy routine. Based on the calibration we draw implications for future convergence of the Czech economy.
    Date: 2007–05–15
  8. By: Shintaro Yamaguchi
    Abstract: What are the sources of rapid wage growth during a worker’s early career? To address this question, I construct and estimate a model of strategic wage bargaining with on-the-job search to explore three different components of wages: general human capital, match-specific capital, and outside option. Workers search for alternative job opportunities on the job and accumulate human capital through learning-by-doing. As the workers find better job opportunities, the current employer has to compete with outside firms to retain them. This between-firm competition improves the outside option value of the worker, which results in wage growth on the job even when productivity remains the same. The model is estimated by a simulated minimum distance estimator and data from the NLSY 79. The parameter estimates are used to simulate counterfactuals. The results indicate that the improved value of outside option raises wages of ten-year-experienced workers by 16%, which accounts for about 30% of the wage growth during the first ten years of career. I also find that human capital accumulation affects wage profile not only because it directly changes labor productivity, but also because it alters job search behavior due to low future productivity.
    Keywords: Search, Matching, Age-earnings profile, Structural Estimation
    JEL: J31 J63 J64
    Date: 2007–05
  9. By: Brito, Paulo; Dixon, Huw (Cardiff Business School)
    Abstract: In this paper we consider the entry and exit of firms in a dynamic general equilibrium model with capital and a fixed labour supply. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U-shaped cost curve with optimal firm size. Entry is determined by a free entry condition such that the costs of entry are equal to the present value of incumbent firms. As short run profits are a decreasing function of the number of firms, we add a new stability mechanism in addition to the diminishing returns to capital. Then equilibrium is saddle-point stable and the stable manifold is two-dimensional. Transitional dynamics can, under certain circumstances, be non-monotonic. We study the effects of productivity and fixed cost shocks on the aggregate activity, the number and the size of firms.
    Keywords: Entry; dynamics; Ramsey
    JEL: D92 C62 E32 O41
    Date: 2007–06
  10. By: Alberto Bucci (University of Milan)
    Abstract: This paper reconsiders the effects of population growth on per-capita income growth within a Romerian (1990)-type endogenous growth model with human capital accumulation. One important novelty of our contribution is that in the human capital accumulation equation we explicitly consider the possibility that agents' investment in skill acquisition might be positively, negatively or not influenced at all by technological progress. We find that both the growth rate and the level of real per-capita income are independent of population size. Moreover, population growth may affect or not real per-capita income growth depending on the size of the degree of altruism of agents towards future generations and on the nature of technical progress, for given agents' degree of altruism.
    Keywords: Horizontal Innovation; Technological Change; Population Growth; Human Capital; Multi-Sector Endogenous Growth, Scale Effects.,
    Date: 2007–02–12
  11. By: David M. Arseneau; Sanjay K. Chugh
    Abstract: Costly nominal wage adjustment has received renewed attention in the design of optimal policy. In this paper, we embed costly nominal wage adjustment into the modern theory of frictional labor markets to study optimal fiscal and monetary policy. Our main result is that the optimal rate of price inflation is highly volatile over time despite the presence of sticky nominal wages. This finding contrasts with results obtained using standard sticky-wage models, which employ Walrasian labor markets at their core. The presence of shared rents associated with the formation of long-term employment relationships sets our model apart from previous work on this topic. The existence of rents implies that the optimal policy is willing to tolerate large fluctuations in real wages that would otherwise not be tolerated in a standard model with Walrasian labor markets; as a result, any concern for stabilizing nominal wages does not translate into a concern for stabilizing nominal prices. Our model also predicts that smoothing of labor tax rates over time is a much less quantitatively-important goal of policy than standard models predict. Our results demonstrate that the level at which nominal wage rigidity is modeled -- whether simply lain on top of a Walrasian market or articulated in the context of an explicit relationship between workers and firms -- can matter a great deal for policy recommendations.
    Date: 2007
  12. By: Alexandre Sokic
    Abstract: This paper aims at drawing new guidelines for investigation of monetary hyperinflation analysis. We propose a MIUF optimizing model and show that monetary hyperinflation can occur as a perfect foresight competitive equilibrium path only when money is essential in the sense of Scheinkman (1980). This result emerges without any ad-hoc assumption implying the inclusion of friction in the adjustment of some nominal variable. It suggests that monetary hyperinflation analysis under perfect foresight requires abandoning the Cagan money demand and adopting a demand for money respecting money essentiality.
    Keywords: monetary hyperinflation, seigniorage, inflation tax, money essentiality.
    JEL: E31 E41
    Date: 2007
  13. By: Max Blouin; Stéphane Pallage
    Abstract: In this paper, we build a model of agrarian economies in which a kleptocratic government taxes farmers to maximize its life-time utility. The model is a dynamic general equilibrium model in which the subsistence of farmers requires a minimum level of consumption. We analyze the effect that a benevolent food aid agency can have in such an environment. If it expects the food aid agency to intervene, the kleptocratic government will starve its farmers, in a clear case of the Samaritan's dilemma. We show that the likelihood of man-made famines, however, can be greatly reduced if the food aid agency intervenes with probability slightly lower than one. No aid agency devoted to saving lives, however, can commit to such policy. We propose a solution to this food aid curse.
    Keywords: Food aid, famines, commitment
    JEL: F35 D72 C72
    Date: 2007
  14. By: Francois Ortalo-Magne; Andrea Prat
    Abstract: Equilibrium of the housing market depends on a complex set of interactions between: (1)individual location decisions; (2) individual housing investment; (3) collective decisions onurban growth. We embed these three elements in a model of a dynamic economy with twosources of friction: ill-de…ned property rights on future land development and uninsurableshocks a¤ecting labor productivity. We characterize the feedback between the households’desire to invest in housing as a hedge against the risk of rent ‡uctuations and their supportfor supply restrictions once they own housing. The model generates an ine¢ ciently lowsupply of housing in equilibrium. The model also rationalizes the persistence of housingundersupply: the more restricted the initial housing supply, the smaller the city size selectedby the voting process. We use the model to study the e¤ects of a number of policies andinstitutional changes.
    Keywords: Housing Supply, Housing Demand, Regulatory Policies, Political Economy.
    JEL: R31 R21 R38 D72
    Date: 2007–01
  15. By: Mario Catalán; Jaime Guajardo; Alexander W. Hoffmaister
    Abstract: This paper evaluates the macroeconomic and welfare effects of extending the averaging period used to calculate pension benefits in a pay-as-you-go system. It also examines the complementarities between reforms extending the averaging period and those increasing the retirement age under alternative tax policies. The analysis is based on a model in the Auerbach-Kotlikoff tradition applied to the Spanish economy. Without reforms, the simulations suggest that aging-related spending as a share of output will increase 16 percentage points by 2050, which are twice as much as in European Commission (2006) projections due to general equilibrium effects. Also, reforms extending the averaging period to the entire work life limit expenditure pressures at the peak of the demographic shock as much as increasing the retirement age in line with life expectancy (4 percentage points of GDP). These reforms and prefunding the demographic shock mitigate the adverse macroeconomic effects of aging and improve welfare.
    Date: 2007–05–24
  16. By: Charlot, Olivier; Decreuse, Bruno
    Abstract: This paper studies the efficiency of educational choices in a two sector/two schooling level matching model of the labour market where a continuum of heterogenous workers allocates itself between sectors depending on their decision to invest in education. Individuals differ in ability and schooling cost, the search market is segmented by education, and there is free entry of new firms in each sector. Self-selection in education originates composition effects in the distribution of skills across sectors. This in turn modifies the intensity of job creation, implying the private and social returns to schooling always differ. Provided that ability and schooling cost are not too positively correlated, agents with large schooling costs — the ‘poor’ — select themselves too much, while there is too little self-selection among the low schooling cost individuals — the ‘rich’. We also show that education should be more taxed than subsidized when the Hosios condition holds.
    Keywords: Ability; Schooling cost; Heterogeneity; Matching frictions; Efficiency
    JEL: J24 J60 I20
    Date: 2006
  17. By: Decreuse, Bruno
    Abstract: This paper proposes a multi-sector matching model where workers have (symmetric) sector-specific skills and the search market is segmented by sector. Workers choose the range of markets they are willing to participate in. I identify a composition externality: workers do not take into account the impact of their choice on sector-specific mean productivity among the pools of job-seekers. Consequently, workers prospect too many market segments, and there is room for public policy even when the so-called Hosios condition holds.
    Keywords: Composition effects; Heterogeneity; Segmented markets; Efficiency
    JEL: J64 D83 D62
    Date: 2003
  18. By: David de la Croix; Omar Licandro
    Abstract: We propose a new theory of the demographic transition based on the evidence that body development during childhood is an important factor for life expectancy. The key and novel mechanism of the model is that parents face a tradeoff between the quantity of children and the childhood development spending they afford on each of them. It is in this sense that we refer to Wordsworth’s aphorism that “The (Father of) Child is the Father of Man.” This tradeoff makes life expectancy and fertility move in opposite direction. Along these lines, we propose a continuous time model where fertility, childhood development, longevity, education and income growth result all from individual decisions. The dynamics display the key features of the demographic transition, including the hump in population growth, and replicate the observed rise in educational attainments and life expectancy. Consistent with the empirical evidence, a distinctive implication of our theory is that childhood development leads the rise in education.
    Keywords: Life Expectancy, Body Height, Human Capital, Fertility, Mortality
    JEL: J11 I12 N30 I20 J24
    Date: 2007
  19. By: Bruchez, Pierre-Alain
    Abstract: In an empirical paper based on five large devaluation episodes in Argentina, Brazil, Korea, Mexico and Thailand, Burstein and al. (2005a) find a very slow adjustment in the prices of non-tradable goods and services after large devaluations. Burnstein and al. (2005b) develop a quantitative general-equilibrium model that can account for this phenomenon. I consider an alternative, simpler model and explore under which conditions moderate menu costs can explain the muted response of the prices of non-tradables. The key new element in this alternative model is a nominal friction in wage-setting (generated by menu costs for changing wages). I find, for example, that although my model is based on menu costs, it is able to deliver not only constant prices of non-tradables, but also small price changes (in reality these prices do change, albeit by far less than the exchange rate). I also discuss the existence of multiple equilibria and the role of central-bank credibility.
    Keywords: large devaluation; exchange rate; pass-through; sticky prices; sticky wages
    JEL: F31
    Date: 2007–04–03

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