nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒08‒18
eleven papers chosen by
Christian Zimmermann
University of Connecticut

  1. Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks By Szilárd Benk; Max Gillman; Michal Kejak
  2. Computation of Equilibria in OLG Models with Many Heterogeneous Households By Sebastian Rausch; Thomas F. Rutherford
  3. Distortionary Taxation, Rule of Thumb Consumers and the Effect of Fiscal Reforms By Andrea Colciago
  4. International Capital Flows By Cedric Tille; Eric van Wincoop
  5. The Optimum Growth Rate for Population Reconsidered By Klaus Jäger; Wolfgang Kuhle
  6. Bargaining, Search, and Outside Options By Anita Gantner
  7. Establishment heterogeneity, exporter dynamics, and the effects of trade liberalization By George Alessandria; Horag Choi
  8. high level of international risk sharing when the productivity growth contains long run risk By Chang, Yanqin
  9. Banking, Inside Money and Outside Money By Sun, Hongfei
  10. Malaria: Disease Impacts and Long-Run Income Differences By Douglas Gollin; Christian Zimmermann
  11. Global indeterminacy in locally determinate RBC models By Tarek Coury; Yi Wen

  1. By: Szilárd Benk (Magyar Nemzeti Bank); Max Gillman (Cardiff Business School); Michal Kejak (CERGE-EI)
    Abstract: The paper sets the neoclassical monetary business cycle model within endogenous growth, adds exchange credit shocks, and finds that money and credit shocks explain much of the velocity variation. The role of the shocks varies across sub-periods in an intuitive fashion. Endogenous growth is key to the construction of the money and credit shocks since these have similar effects on velocity, but opposite effects upon growth. The model matches the data's average velocity and simulates well velocity volatility. Its Cagan-like money demand means that money and credit shocks cause greater velocity variation the higher is the nominal interest rate.
    Keywords: Velocity, business cycle, credit shocks, endogenous growth.
    JEL: E13 E32 E44
    Date: 2007
  2. By: Sebastian Rausch; Thomas F. Rutherford
    Abstract: This paper develops a decomposition algorithm by which a market economy with many households may be solved through the computation of equilibria for a sequence of representative agent economies. The paper examines local and global convergence properties of the sequential recalibration (SR) algorithm. SR is then demonstrated to efficiently solve Auerbach-Kotlikoff OLG models with a large number of heterogeneous households. We approximate equilibria in OLG models by solving a sequence of related Ramsey optimal growth problems.This approach can provide improvements in both efficiency and robustness as compared with simultaneous solution-methods.
    Keywords: Computable general equilibrium, overlapping generations, microsimulation, sequential recalibration
    JEL: C68 C81 D61 D91
    Date: 2007–06
  3. By: Andrea Colciago (Department of Economics, University of Milan-Bicocca)
    Abstract: We consider a standard growth model augmented with a share of rule of thumb con- sumers. A Government ?nances a preset level of public expenditure through ?at tax rates on labor and capital income and also makes lump sum transfers to non ricardian consumers. It has been shown in representative agents models with perfect competition that balanced budget rules with endogenous tax rates are likely to generate indetermi- nacy of the perfect foresight equilibrium. We show that the presence of rule of thumb consumers reduces this possibility. Further, we show that a ?scal reform which features a reduction in the capital income tax rate and leads to the steady state where the welfare of non ricardian agents is maximized could be Pareto improving. This is obtained via a direct redistribution of resources to rule of thumb consumers along the transition path.
    Keywords: Non Ricardian Agents, Fiscal Policy, Capital Income Tax Rate
    JEL: E62
    Date: 2007
  4. By: Cedric Tille (Federal Reserve Bank of New York); Eric van Wincoop (University of Virginia, NBER)
    Abstract: The sharp increase in both gross and net capital flows over the past two decades has led to a renewed interest in their determinants. Most existing theories of international capital flows are in the context of models with only one asset, which only have implications for net capital flows, not gross flows. Moreover, there is no role for capital flows as a result of changing expected returns and risk-characteristics of assets as there is no portfolio choice. In this paper we develop a method for solving dynamic stochastic general equilibrium open-economy models with portfolio choice. We show why standard first- and secondorder solution methods no longer work in the presence of portfolio choice, and extend them giving special treatment to the optimality conditions for portfolio choice. We apply the solution method to a particular two-country, two-good, two-asset model and show that it leads to a much richer understanding of both gross and net capital flows. The approach highlights time-varying portfolio shares, resulting from time-varying expected returns and risk characteristics of the assets, as a potential key source of international capital flows.
    Keywords: international capital flows, portfolio allocation, home bias.
    JEL: F32 F36 F41
    Date: 2007–06
  5. By: Klaus Jäger; Wolfgang Kuhle (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: This article gives exact general conditions for the existence of an interior optimum growth rate for population in the neoclassical two-generations-overlapping model. In an economy where high (low) growth rates of population lead to a growth path which is efficient (inefficient) there always exists an interior optimum growth rate for population. In all other cases there exists no interior optimum. The Serendipity Theorem, however, does in general not hold in an economy with government debt. Moreover, the growth rate for population which leads an economy with debt to a golden rule allocation can never be optimal.
    Date: 2007–08–14
  6. By: Anita Gantner
    Abstract: This paper studies a two-sided incomplete information bargaining model between a seller and a buyer. The buyer has an outside option, which is modeled as a sequential search process during which he can also choose to return to bargaining at any time. Two cases considered: In Regime I, both agents have symmetric information about the search parameters. We find that, in contrast to bargaining with complete information, the option to return to bargaining is not redundant in equilibrium. However, the no-delay result still holds. In Regime II, where agents have asymmetric information about the outside option, delay is possible. The solution characterizes the parameters for renegotiation and those for search with no return to the bargaining table.
    Keywords: Bargaining, Two-sided Incomplete Information, Outside Option, Search
    JEL: C78 D83 C61
    Date: 2007–08
  7. By: George Alessandria; Horag Choi
    Abstract: The authors study a variation of the Melitz (2003) model, a monopolistically competitive model with heterogeneity in productivity across establishments and fixed costs of exporting. They calibrate the model to match the employment size distribution of US manufacturing establishments. Export participation in the calibrated model is then compared to the data on US manufacturing exporters. With fixed costs of starting to export about 3.9 times as large as costs of continuing as an exporter, the model can match both the size distribution of exporters and transition into and out of exporting. The calibrated model is then used to estimate the effect of reducing tariffs on welfare, trade, and export participation. The authors find sizeable gains to moving to free trade. Contrary to the view that the gains to lowering tariffs are larger in models with export decisions, they find that steady state consumption increases by less in their benchmark model of exporting than in a similar model without fixed costs. However, they also find that comparisons of steady state consumption understate the welfare gains to trade reform in models with fixed costs and overstate the welfare gains in models without fixed costs. With fixed costs, tariffs lead to an overaccumulation of product varieties which can be used more effectively along the transition to the new steady state. Thus, following trade liberalizations economic activity overshoots its steady state, with the peak in output coming 10 years after the trade reform. Finally, the authors explore the impact of the key modelling assumptions in the theoretical literature for quantitative results.
    Keywords: Trade ; Tariff ; Exports
    Date: 2007
  8. By: Chang, Yanqin
    Abstract: This theoretical paper investigates international risk sharing and its implications for equity home bias. A general equilibrium model, featuring two closed economies with nontrivial production sectors, is developed. Moreover, productivity contains a small but persistent highly correlated long run risk that becomes the major determinant of the intertemporal marginal rate of substitution (IMRS) in a model with the recursive preferences. Despite adopting the model of closed economies and autarkic asset holdings—a scenario leading to the lowest level of international risk sharing under the same conditions—our model is still able to generate international risk sharing indexes always over 96% for a broad range of parameter values, excepting two cases: where the elasticity of intertemporal substitution (EIS) is the reciprocal of the relative risk aversion (RRA); and where EIS is around 0.7. In those cases, the risk sharing index drops sharply to about 30%. This result sheds light on why the benchmark model, featuring a power utility whereby EIS is the reciprocal of RRA, generates international risk sharing as low as 30%. However, when EIS takes these values, our model’s results cannot be reconciled with asset market data-model yields low volatility of the logarithms of IMRS, even lower than Hansen-Jagannathan lower bound. The implication is that the low proportion of foreign assets in a domestic agent’s portfolio, a phenomenon observed in the data, might not be a puzzle or a departure from the agent's optimality condition. After all, risk has already been well shared internationally due to the high correlations across countries of the long run productivity shocks. Hence, there is not much incentive left for an agent to hold foreign assets in her portfolio to further share the risk internationally. Therefore, equity home bias might not be a puzzle as claimed by the benchmark model, in the sense that it can be adequately reconciled with our theoretical result
    Keywords: International risk sharing; production; long run risk; recursive preferences;
    JEL: G11 F30
    Date: 2007–09
  9. By: Sun, Hongfei
    Abstract: This paper presents an integrated theory of money and banking. I address the following question: when both individuals and banks have private information, what is the optimal way to settle debts? I develop a dynamic model with micro-founded roles for banks and a medium of exchange. I establish two main results: first, markets can improve upon the optimal dynamic contract at the presence of private information. Market prices fully reveal the aggregate states and help solve the incentive problem of the bank. Secondly, it is optimal for the bank to require loans be settled with short-term inside money, i.e. bank money that expires immediately after the settlement of debts. Short-term inside money dominates outside money because the former makes it less costly to induce truthful revelation and achieve more efficient risk sharing.
    Keywords: banking; inside money; outside money
    JEL: G2 E4
    Date: 2007–08
  10. By: Douglas Gollin (Williams College); Christian Zimmermann (University of Connecticut)
    Abstract: The World Health Organization (WHO) reports that malaria, a parasitic disease transmitted by mosquitoes, causes over 300 million episodes of "acute illness" and more than one million deaths annually. Most of the deaths occur in poor countries of the tropics, and especially sub-Saharan Africa. Some researchers have suggested that ecological differences associated with malaria prevalence are perhaps the most important reason why some countries today are rich and others poor. This paper explores the question in an explicit dynamic general equilibrium framework, using a calibrated model that incorporates epidemiological features into a standard general equilibrium framework.
    Keywords: Malaria, Epidemiology, GDP, Disease prevention, Sub-Saharan Africa.
    JEL: I1 O11 E13 E21
    Date: 2007–08
  11. By: Tarek Coury; Yi Wen
    Abstract: We investigate the global dynamics of RBC models with production externalities. We confirm that purely local analysis does not tell the full story. With externalities smaller than required for local indeterminacy, local analysis shows the steady state to be a saddle, implying a unique equilibrium. But global analysis reveals the steady state is surrounded by stable deterministic cycles. Our analysis suggests that indeterminacy is more robust than previously realized, and the results strengthen the view that caution should be exercised when linearized versions of this class of RBC models are used in applied work.
    Date: 2007

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