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on Dynamic General Equilibrium |
| By: | Claudio Campanale (University of Alicante, Spain); Rui Castro (University of Montreal, Canada.); Gian Luca Clementi (New York University, USA and The Rimini Centre for Economic Analysis, Italy) |
| Abstract: | In this paper we provide a thorough characterization of the asset returns implied by a simple general equilibrium production economy with convex investment adjustment costs. When households have EpsteinÐZin preferences, there exist plausible parameter values such that the model generates unconditional mean riskÐfree rate and equity return, and volatility of consumption growth, which are in line with historical averages for the US economy. Consistently with the data, the priceÐdividend ratio is proÐcyclical and stock returns are predictable (and increasingly so as the time horizon increases), while dividend growth is not. The model also implies realistic values for (i) the correlation of the riskÐfree rate with output growth and consumption growth and (ii) the correlation pattern between riskÐfree rate, equity return, and equity premium. The risk implied by the model is rather low. Given the work of Rabin (2000) among others, it is not surprising that our EpsteinÐZin agent exhibits a much higher risk aversion when faced with substantially larger risks. This shortcoming, however, does not extend to the case in which agents are disappointment averse in the sense of Gul (1991). When faced with a lottery that has a coefficient of variation 100 times as large as that implied by our model, a disappointment averse agent displays the same relative risk aversion as an expected utility agent with logarithmic utility! |
| Keywords: | Equity Premium, Business Cycle, Predictability, Disappointment Aversion. |
| JEL: | D81 E32 E43 E44 G12 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:07-07&r=dge |
| By: | Cenesiz, Alper; Pierdzioch, Christian |
| Abstract: | We used a two-country optimizing “new-open-economy macroeconomics” model to analyze the implications of financial market integration for the fiscal multiplier. The fiscal multiplier measures the accumulated effect of fiscal policy on output. Our model features a labor-market friction in the form of labor-market search. The conventional wisdom derived from the classic Mundell-Fleming model has been that financial market integration diminishes the fiscal multiplier. We show that labor-market search model implies that financial market integration should increase rather than decrease the fiscal multiplier. |
| Keywords: | Open-economy macroeconomics; Financial market integration; Labor-market search; Fiscal policy |
| JEL: | F36 F41 E62 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2687&r=dge |
| 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. |
| Keywords: | Taxation ; Wealth |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-07-08&r=dge |
| By: | Igor Livshits; James MacGee; Michèle Tertilt |
| Abstract: | Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, the rise in filings appears to mainly reflect changes in the credit market environment. We find that credit market innovations which cause a decrease in the transactions cost of lending and a decline in the cost of bankruptcy can largely accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant. |
| JEL: | E21 E44 G18 K35 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13363&r=dge |
| By: | Funke, Michael (BOFIT); Strulik, Holger (BOFIT) |
| Abstract: | This paper analyses the long-run effects of Estonia’s 2000 Income Tax Act with a dynamic general equilibrium model. Specifically, we consider the impact of the shift from an imputation system to one where companies only pay taxes on distributed profits. Balanced growth paths, transitional dynamics and welfare costs are computed. Our results indicate that the 2000 Income Tax Act leads to higher per capita income and investment, but lower welfare. A sensitivity analysis shows the results are rather robust. |
| Keywords: | growth; welfare; taxation; tax reform; Estonia |
| JEL: | H25 H32 O41 O52 |
| Date: | 2007–09–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2003_010&r=dge |
| By: | Raquel Fernandez |
| Abstract: | Married women's labor force participation has increased dramatically over the last century. Why this has occurred has been the subject of much debate. This paper investigates the role of culture as learning in this change. To do so, it develops a dynamic model of culture in which individuals hold heterogeneous beliefs regarding the relative long-run payoffs for women who work in the market versus the home. These beliefs evolve rationally via an intergenerational learning process. Women are assumed to learn about the long-term payoffs of working by observing (noisy) private and public signals. They then make a work decision. This process generically generates an S-shaped figure for female labor force participation, which is what is found in the data. The S shape results from the dynamics of learning. I calibrate the model to several key statistics and show that it does a good job in replicating the quantitative evolution of female LFP in the US over the last 120 years. The model highlights a new dynamic role for changes in wages via their effect on intergenerational learning. The calibration shows that this role was quantitatively important in several decades. |
| JEL: | E2 J21 Z1 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13373&r=dge |
| By: | Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Jorge Restrepo (Banco Central de Chile) |
| Abstract: | We build a general equilibrium model of a small open economy, with the purpose of analyzing the effects of a countercyclical rule-based fiscal regime, which corresponds to a stylized version of the structural balance in place in Chile. The economy exports a domestically-produced good and one natural resource (commodity), which is partly state-owned, generating income to the government. We analyze how shocks are transmitted to the economy in the presence of this fiscal rule by introducing shocks to government spending, taxes, and the price of the natural resource. In the last shock, we compare our structural rule with a case where the budget is always balanced. The results make a strong case for the adoption of the latter in other commodityexporting economies. |
| Keywords: | open economy, fiscal policy, rule of thumb consumers, government spending. |
| JEL: | E32 E62 H41 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ila:ilades:inv183&r=dge |
| By: | Geng Li |
| Abstract: | The Rational Expectations Permanent Income Hypothesis (RE-PIH) fails to explain several features of consumption behavior documented by previous researchers. First, the marginal propensity to consume (MPC) out of unanticipated income shocks tends to decrease as the size of the shocks becomes larger. Second, the MPC out of small income shocks is well above what the RE-PIH predicts. Third, consumption responds to small anticipated income changes, but not to large ones. This paper argues that these findings can be reconciled within a RE-PIH framework that includes a cash-in-advance constraint. In the model, the representative agent is assumed to be fully rational with perfect information and is able to borrow against future income. The agent can hold cash and interest-bearing assets, but has to pay a fixed transaction cost to transfer wealth between cash and assets. I show that the agent follows an s-S rule with respect to cash holdings in making wealth-transfer decisions. The MPC within the no-transfer band is higher than that out of the band. It can be lower than or exactly equal to 1. The model also predicts that agents smooth consumption in response to news of large future income changes but not to small ones. Furthermore the model sheds light on the demand for liquid assets and the equity premium puzzle. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-38&r=dge |