New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒09‒24
thirteen papers chosen by



  1. The role of search frictions for output and inflation dynamics: a Bayesian assessment By Martin Menner
  2. Does Money Matter for the Identification of Monetary Policy Shocks: A DSGE Perspective. By Céline Poilly
  3. Choosing Longevity with Overlapping Generations By Weichun Chen; Merwan Engineer; Ian King
  4. On the Welfare Implications of Financial Globalization without Financial Development By Enrique G. Mendoza; Vincenzo Quadrini; José-Victor Ríos-Rull
  5. Financing unemployment benefits by goods market competition: fiscal policy and deregulation with market imperfections By Antonio Scialà; Riccardo Tilli
  6. Optimal taxation in a growth model with public consumption and home production By Jie Zhang; James Davies; Jinli Zeng; Stuart McDonald
  7. Financial Innovation and the Transactions Demand for Cash By Fernando E. Alvarez; Francesco Lippi
  8. Financial Innovation and the Transactions Demand for Cash By Alvarez, Fernando E; Lippi, Francesco
  9. Limited Commitment Models of the Labour Market By Jonathan P Thomas; Tim Worrall
  10. INCREASING RETURNS, FINANCIAL CAPITAL MOBILITY AND REAL EXCHANGE RATE DYNAMICS By Steven Pennings; Rod Tyers
  11. On the Stability of Balanced Growth By Jan Wenzelburger; Volker Böhm; Thorsten Pampel
  12. Reassessing the Ins and Outs of Unemployment By Robert Shimer
  13. Pricing and Signaling with Frictions By Alain Delacroix; Shouyong Shi

  1. By: Martin Menner
    Abstract: Search frictions in the goods market have proven to be a fruitful deviation from the fiction of a centralized Walrasian market providing a micro-foundation of the use of money as a medium of exchange. Moreover, persistent propagation of monetary shocks can arise in search-theoretic monetary models through the interaction of search-frictions in the goods and labor markets, and inventory holdings. Here, a search-theoretic monetary DSGE model with capital and inventory investment is estimated, and its implications on output and inflation dynamics are contrasted with those of standard flexible price monetary models: a cash-in-advance and a portfolio adjustment cost model. Model estimation and comparison is conducted in a Bayesian way in order to account for possible model misspecification. The search model can track inflation and output data better, as well as it dominates the other models in the ability to predict the autocorrelations of inflation and the persistent disinflation process after a technology shock. It generates a hump-shaped but not strong enough output response to a monetary shock. Current and near current correlations between output growth inflation are predicted well.
    Date: 2007–09
    URL: http://d.repec.org/n?u=RePEc:cte:werepe:we076235&r=dge
  2. By: Céline Poilly (Banque de France, DGEI-DIR, Service de Recherche en économie et finance, and University of Cergy-Pontoise,THEMA)
    Abstract: This paper investigates how the identification assumptions of monetary policy shocks modify the inference in a standard DSGE model. Considering SVAR models in which either the interest rate is predetermined for money or these two monetary variables are simultaneously determined, two DSGE models are estimated by Minimum Distance Estimation. We emphasize that real balance effects are necessary to replicate the high persistence implied by the simultaneity assumption. In addition, the estimated monetary policy rule is strongly sensitive to the identification scheme. This suggests that the way to introduce money in the identification scheme is not neutral for estimation of DSGE models.
    Keywords: SVAR model; DSGE model; Non recursive identification; Money.
    JEL: E41 E52 C52
    Date: 2007
    URL: http://d.repec.org/n?u=RePEc:ema:worpap:2007-23&r=dge
  3. By: Weichun Chen; Merwan Engineer; Ian King
    Abstract: We extend Diamond’s (1965) OLG model to allow agents to choose whether to participate in the second period of life. The valuation of early exit (x) is a key parameter. We characterize competitive equilibria, efficient allocations, and predictions for income and life expectancy over time. We find that, with logarithmic utility, for any value of x, there is a range of initial values of the capital stock for which some agents would prefer to exit in equilibrium. The shape of the transition function and the number of steady state equilibria depend crucially on the value of capital’s share of income.
    Keywords: ndogenous longevity, overlapping generations, growth
    JEL: D91 O1
    Date: 2007
    URL: http://d.repec.org/n?u=RePEc:mlb:wpaper:1002&r=dge
  4. By: Enrique G. Mendoza; Vincenzo Quadrini; José-Victor Ríos-Rull
    Abstract: It is widely argued that countries can reap large gains from liberalizing their capital accounts if financial globalization is accompanied by the development of domestic institutions and financial markets. However, if liberalization does not lead to financial development, globalization can result in adverse effects on social welfare and the distribution of wealth. We use a multi-country model with non-insurable idiosyncratic risk to show that, if countries differ in the degree of asset market incompleteness, financial globalization hurts the poor in countries with less developed financial markets. This is because in these countries liberalization leads to an increase in the cost of borrowing, which is harmful for those heavily leveraged, i.e. the poor. Quantitative analysis shows that the welfare effects are sizable and may justify policy intervention.
    JEL: E2 E44 F32 F36 F4
    Date: 2007–09
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:13412&r=dge
  5. By: Antonio Scialà (Università di Padova); Riccardo Tilli (Università di Roma)
    Abstract: We consider a model in which the labor market is characterized by search frictions and there is monopolistic competition in the goods market. We introduce proportional income taxation and unemployment benefits with Government balanced budget constraint. Then, we evaluate the effects of both more competition in the goods market and higher unemployment benefits on labor market equilibrium and equilibrium tax rate. We show that more competition has a positive effect on equilibrium unemployment and the Government budget. Higher unemployment benefits can be financed either by higher tax rate or increasing goods market competition. Liberalization policies could permit: a) to avoid an increase in unemployment if we allow some rise in the tax rate; b) to decrease unemployment if they are incisive enough to keep the tax rate unchanged.
    Keywords: Matching Models, Monopolistic Competition, Fiscal Policy, Unemployment Insurance
    JEL: H20 J64 J65
    Date: 2007–09
    URL: http://d.repec.org/n?u=RePEc:pad:wpaper:0047&r=dge
  6. By: Jie Zhang (MRG - School of Economics, The University of Queensland); James Davies (Department of Economics, University of Western Ontario); Jinli Zeng (Department of Economics, National University of Singapore); Stuart McDonald (Department of Economics, California Institute of Technology)
    Abstract: In a neoclassical growth model with public consumption, we show the following Pareto optimal tax rules. The government should tax leisure and private consumption at the same rate, and subsidize net investment at the same rate it taxes net capital income. Also, it should tax capital income more heavily than labor income. In an extension for home production, the additional rule is to tax investment for home production at the same rate of the tax on private market consumption. These tax and subsidy rates should be constant over time except the initial tax rate on capital income.
    URL: http://d.repec.org/n?u=RePEc:qld:uqmrg6:17&r=dge
  7. By: Fernando E. Alvarez; Francesco Lippi
    Abstract: We document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from precautionary motives. We extend the Baumol-Tobin cash inventory model to a dynamic environment that allows for the possibility of withdrawing cash at random times at a low cost. This modification introduces a precautionary motive for holding cash and naturally captures developments in withdrawal technology, such as the increasing diffusion of bank branches and ATM terminals. We characterize the solution of the model and show that qualitatively it is able to reproduce the empirical patterns. Estimating the structural parameters we show that the model quantitatively accounts for key features of the data. The estimates are used to quantify the expenditure and interest rate elasticity of money demand, the impact of financial innovation on money demand, the welfare cost of inflation, the gains of disinflation and the benefit of ATM ownership.
    JEL: E31 E4 E41
    Date: 2007–09
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:13416&r=dge
  8. By: Alvarez, Fernando E; Lippi, Francesco
    Abstract: We extend the Baumol-Tobin cash inventory model to a dynamic environment, which allows for the possibility of withdrawing cash at random times at a low cost. This modification captures developments in withdrawal technology, such as the increasing diffusion of bank branches and ATM terminals. We document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from precautionary motives. We characterize the solution of the model and show that qualitatively it is able to reproduce such patterns. Estimating the structural parameters we show that the model accounts for key features of the data. The estimates are used to quantify the expenditure and interest rate elasticity of money demand, the impact of financial innovation on money demand, the welfare cost of inflation, the gains of disinflation and the benefit of ATM ownership.
    Keywords: inventory models; money demand; technological progress
    JEL: E5
    Date: 2007–09
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:6472&r=dge
  9. By: Jonathan P Thomas (Economics, University of Edinburgh); Tim Worrall (Economics, Keele University)
    Abstract: We present an overview of models of long-term self-enforcing labour contracts in which risk sharing is the dominant motive for contractual solutions. A base model is developed which is sufficiently general to encompass the two-agent problem central to most of the literature, including variable hours. We consider two-sided limited commitment and look at its implications for aggregate labour market variables. We consider the implications for empirical testing and the available empirical evidence. We also consider the one-sided limited commitment problem for which there exists a considerable amount of empirical support.
    Keywords: Labour contracts, self-enforcing contracts, business cycle, unemployment.
    JEL: E32 J41
    Date: 2007–09
    URL: http://d.repec.org/n?u=RePEc:kee:kerpuk:2007/11&r=dge
  10. By: Steven Pennings; Rod Tyers
    Abstract: The 1990s appreciation of the US$ has been blamed on the “irrational exuberance” of investors in the US IT boom. A core of these investors appeared to believe that technology-related productivity growth (due, in part, to knowledge spill-over externalities) would raise the relative US rate of return over a sustained period. This paper introduces a two country, dynamic general equilibrium model with international financial capital mobility and trade to investigate the conditions under which a single technology shock could cause such a sustained change in capital flows. We find that a once-off productivity shock, whether in the presence of (small-medium) externalities or not, leads to capital inflow and a real appreciation in the short term but is followed in the long term by a stabilisation of the capital account and a net depreciation of the real exchange rate. For a single shock to trigger long-term growth in relative capital returns appears to require unrealistically large externalities. The presence of adaptive expectations can lead to persistence and cyclical behaviour in the real exchange rate and current account.
    JEL: F21 F31 F32 F41 F43
    Date: 2007–09
    URL: http://d.repec.org/n?u=RePEc:acb:camaaa:2007-16&r=dge
  11. By: Jan Wenzelburger (Keele University, Centre for Economic Research and School of Economic and Management Studies); Volker Böhm (Dept. of Business Administration and Economics, Bielefeld University,); Thorsten Pampel (Dept. of Business Administration and Economics, Bielefeld University,)
    Abstract: Common folklore in growth theory suggests that the stability of balanced growth paths in the capital-labor space is essentially guaranteed by conditions which imply stability of the corresponding steady states of the models in intensity form. We show by means of simple examples that, in general, these well-known conditions are only necessary. For a class of deterministic growth models with discrete time we provide new structural insights into the nature of this phenomenon by stating additional requirements that ensure stability of balanced growth paths in the original capital-labor space. We introduce a notion of path-wise convergence for stochastic growth models and generalize our sufficient conditions to the stochastic case.
    Keywords: Balanced growth, stability conditions, stochastic growth, pathwise convergence.
    JEL: O41
    Date: 2007–08
    URL: http://d.repec.org/n?u=RePEc:kee:kerpuk:2007/09&r=dge
  12. By: Robert Shimer
    Abstract: This paper uses readily accessible data to measure the probability that an employed worker becomes unemployed and the probability that an unemployed worker finds a job, the ins and outs of unemployment. Since 1948, the job finding probability has accounted for three-quarters of the fluctuations in the unemployment rate in the United States and the employment exit probability for one-quarter. Fluctuations in the employment exit probability are quantitatively irrelevant during the last two decades. Using the underlying microeconomic data, the paper shows that these results are not due to compositional changes in the pool of searching workers, nor are they due to movements of workers in and out of the labor force. These results contradict the conventional wisdom that has guided the development of macroeconomic models of the labor market during the last fifteen years.
    JEL: J6 E24 E32
    Date: 2007–09
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:13421&r=dge
  13. By: Alain Delacroix; Shouyong Shi
    Abstract: In this paper, we introduce private information into a market with search frictions and evaluate the relative efficiency of two pricing mechanisms, price posting and bargaining. Each seller chooses investment that determines the quality of the good. This quality is the seller's private information before matching and it will be observed in a match. Sellers enter a search market competitively and can choose either to post prices or to bargain. In this environment, a pricing mechanism affects efficiency through the choice of quality and the number of trades. Bargaining induces the efficient choice of quality but an inefficient number of trades because the division of the match surplus is generically inefficient. By directing buyers' search, posted prices internalize search externalities and induce the constrained efficient outcome in the case of public information. However, when the quality is private information, this role of posted prices in directing search can conflict with their role in signaling quality. Focusing on this conflict, we find that bargaining could yield higher efficiency than price posting. We characterize the parameter regions in which each of the two mechanisms dominates in efficiency.
    Keywords: Directed search; Signaling; Bargaining; Efficiency
    JEL: D8 C78 E24
    Date: 2007–09–12
    URL: http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-298&r=dge

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