nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒09‒02
twelve papers chosen by
Christian Zimmermann
University of Connecticut

  1. A Neoclassical Analysis of the Asian Crisis: Business Cycle Accounting of a Small Open Economy By Keisuke Otsu
  2. Financial Intermediaries, Markets, and Growth By Falko Fecht; Kevin X.D. Huang; Antoine Martin
  3. Retirement and Consumption in a Life Cycle Model By David M. Blau
  4. Optimal Capital Income Taxation By Andrew B. Abel
  5. Capital regulation and banks' financial decisions By Haibin Zhu
  6. Delivering Endogenous Inertia in Prices and Output By Alok Johri
  7. Investment Cycles and Sovereign Debt Overhang By Mark Aguiar; Manuel Amador; Gita Gopinath
  8. Malaria: Disease Impacts and Long-Run Income Differences By Douglas Gollin; Christian Zimmermann
  9. Political Stasis or Protectionist Rut? Policy Mechanisms for Trade Reform in a Democracy By Blanchard, Emily; Willmann, Gerald
  10. Cooperation among Overlapping Generations for a Public Project By MAHENC Philippe; ;
  11. Financial Globalization and Emerging Market Portfolios By Michael B Devereux

  1. By: Keisuke Otsu (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper applies the business cycle accounting method a la Chari, Kehoe and McGrattan (2007) to a standard neoclassical small open economy model and assesses the recent crises in Hong Kong, Korea, Singapore and Thailand. The key common features of these crises are the sudden output collapses and consumption drops as large as the output drops. Quantitative results show that the sudden drops in total factor productivity are important in explaining the output drops. Distortions in the foreign debt market are important in Korea and Thailand whereas distortions in the domestic capital market are important in Hong Kong and Singapore in explaining the large consumption drops.
    Keywords: Business Cycle Accounting, Small Open Economy, Asian Crisis
    JEL: E13 E32
    Date: 2007–08
  2. By: Falko Fecht (Deutsche Bundesbank); Kevin X.D. Huang (Department of Economics, Vanderbilt University); Antoine Martin (Federal Reserve Bank of New York)
    Abstract: We build a model in which financial intermediaries provide insurance to households against idiosyncratic liquidity shocks. Households can invest in financial markets directly if they pay a cost. In equilibrium, the ability of intermediaries to share risk is constrained by the market. From a growth perspective, this can be beneficial because intermediaries invest less in the productive technology when they provide more risk-sharing. Our model predicts that bank-oriented economies can grow more slowly than more market-oriented economies, which is consistent with some recent empirical evidence. We show that the mix of intermediaries and markets that maximizes welfare under a given level of financial development depends on economic fundamentals.
    Keywords: Financial intermediaries, financial markets, risk-sharing, Growth <br><br>
    JEL: E44 G10 G20
    Date: 2007–08
  3. By: David M. Blau (Ohio State University and IZA)
    Abstract: Consumption expenditure declines sharply at the time of retirement for many households, but the majority maintain a smooth consumption path. A simple life cycle model with uncertainty about the time of retirement can account for this pattern. A richer version of the model is calibrated to data from the Health and Retirement Study. The median change in consumption expenditure at retirement generated by the model is zero, while the mean is negative, matching the HRS data. However, the magnitude of the drop in consumption among households that experience a decline is too small in the model compared to the data.
    Keywords: retirement, consumption, saving, life cycle model
    JEL: J26 H55
    Date: 2007–08
  4. By: Andrew B. Abel
    Abstract: In an economy with identical infinitely-lived households that obtain utility from leisure as well as consumption, Chamley (1986) and Judd (1985) have shown that the optimal tax system to pay for an exogenous stream of government purchases involves a zero tax rate on capital in the long run, with tax revenue collected by a distortionary tax on labor income. Extending the results of Hall and Jorgenson (1971) to general equilibrium, I show that if purchasers of capital are permitted to deduct capital expenditures from taxable capital income, then a constant tax rate on capital income is non-distortionary. Importantly, even though this specification of the capital income tax imposes a zero effective tax rate on capital, the capital income tax can collect substantial revenue. Provided that government purchases do not exceed gross capital income less gross investment, the optimal tax system will consist of a positive tax rate on capital income and a zero tax rate on labor income--just the opposite of the results of Chamley and Judd.
    JEL: E62 H21
    Date: 2007–08
  5. By: Haibin Zhu
    Abstract: This paper develops a stochastic dynamic model to examine the impact of capital regulation on banks' financial decisions. In equilibrium, lending decisions, capital buffer and the probability of bank failure are endogenously determined. Compared to a flat-rate capital rule, a risk-sensitive capital standard causes the capital requirement to be much higher for small (and riskier) banks and much lower for large (and less risky) banks. Nevertheless, changes in actual capital holdings are less pronounced due to the offsetting effect of capital buffers. Moreover, the non-binding capital constraint in equilibrium implies that banks adopt an active portfolio strategy and hence the counter-cyclical movement of risk-based capital requirements does not necessarily lead to a reinforcement of the credit cycle. In fact, the results from the calibrated model show that the impact on cyclical lending behavior differs substantially across banks. Lastly, the analysis suggests that the adoption of a more risk-sensitive capital regime can be welfare-improving from a regulator's perspective, in that it causes less distortion in loan decisions and achieves a better balance between safety and efficiency.
    Keywords: Capital requirement, economic capital, regulatory capital, actual capital holding, procyclicality effect, dynamic programming, prudential regulation
    Date: 2007–07
  6. By: Alok Johri
    Abstract: This paper presents a DGE model in which aggregate price level inertia is generated endogenously by the optimizing behaviour of price setting ?rms. All the usual sources of inertia are absent here ie., all fi?rms are simultaneously free to change their price once every period and face no adjustment costs in doing so. Despite this, the model generates persistent movements in aggregate output and in?ation in response to a nominal shock. Two modi?cations of a standard one-quarter pre-set price model deliver these results: learning-by-doing and habit formation in leisure.
    Keywords: Endogenous price stickiness, Business Cycles, Inflation, Nominal rigidities, Learning-by-doing, Habit formation, Propagation mechanisms, Persistence.
    JEL: E3
    Date: 2007–08
  7. By: Mark Aguiar; Manuel Amador; Gita Gopinath
    Abstract: We characterize optimal taxation of foreign capital and optimal sovereign debt policy in a small open economy where the government cannot commit to policy and seeks to insure a risk averse domestic constituency. The expected tax on capital is shown to vary with the state of the economy, generating cyclicality in investment and debt in an environment where the first best capital stock is a constant. The government's lack of commitment induces a negative correlation between investment and the stock of government debt, a "debt overhang'' effect. If the government discounts the future at a rate higher than the market, then capital oscillates indefinitely at a level strictly below the first best. Debt relief is never Pareto improving and cannot affect the long-run level of investment. Further, restricting the government to a balanced budget can eliminate the cyclical distortion of investment.
    JEL: F3 H21 H6
    Date: 2007–08
  8. By: Douglas Gollin (Williams College); Christian Zimmermann (University of Connecticut and IZA)
    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
  9. By: Blanchard, Emily; Willmann, Gerald
    Abstract: This paper analyzes the dynamics of trade policy reform under democracy. In an overlapping generations model, heterogeneous agents may acquire skills when young, thereby determining the skill composition of their cohort. Current and anticipated trade policies influence education decisions, and thus the identity of the median voter. We show that there may exist two political steady states: one protectionist and one liberal. Transition from the former to the latter can be achieved by government announcements, temporary educational subsidies, or (exogenous) tariff liberalization by trading partners, but not, in general, by transfer payments to adversely affected workers. We find additionally that reform is politically feasible only if the proposed liberalization is sufficiently large, suggesting that radical reform may be necessary for escaping a “protectionist rut.”
    Keywords: Political Economy, Trade Policy, Skill Acquisition, Politically Stable Policy Paths, Referenda
    JEL: D72 E60 F13 F16
    Date: 2007
  10. By: MAHENC Philippe (LERNA, TSE); ;
    Date: 2007–08
  11. By: Michael B Devereux (Centre for Economic Policy Research, University of British Columbia, and International Monetary Fund (E-mail: devm@
    Abstract: Although emerging market Asian economies have experienced high growth without crises for close to a decade, many commentators find the large buildup of foreign exchange reserves among these economies both puzzling and evidence of incipient global imbalances. This paper reviews some of the experience of Asian countries over the last decade. We focus on the degree to which Asian economies have experienced financial globalization, meaning that their gross external asset and liability positions have grown significantly. In particular, while Asian economies have become significant gross creditors in bonds and other fixed income assets, their liability position in equity and FDI assets has also grown significantly. We show that a simple dynamic general equilibrium model of portfolio choice in an emerging market economy can account for this trend remarkably well.
    Keywords: Asia, Financial Globalization, FDI, Foreign Exchange Rate Reserves
    JEL: E52 E58 F41
    Date: 2007–08
  12. By: Hernando Zuleta; Santiago Alberico
    Abstract: We consider a model of factor saving innovations and study the effects of exogenous changes in labor supply. In a biased innovations setting, as economies accumulate capital, labor becomes relatively scarce and expensive. As a consequence, incentives for labor saving and capital using innovations appear. By the same token, exogenous changes in labor supply affect factor prices. In general, a reduction in labor supply decreases current output and generates incentives for labor saving innovations. Therefore, the effect that a change in the supply of labor has on factor prices is mitigated and, depending on the initial conditions, it may be contrasted by the effect of the technological bias. Finally, the movements of the factor prices affect the saving decisions and consequently the dynamics of economic growth. We explore the consequences of an exogenous decrease in labor supply in two different settings: a homogenous agents model with infinite horizon and an overlapping generations model.
    Date: 2007–03–01

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.
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