nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒09‒30
ten papers chosen by
Christian Zimmermann
University of Connecticut

  1. On-the-job search and the cyclical dynamics of the labor market By Krause, Michael; Lubik, Thomas A.
  2. Does intra-firm bargaining matter for business cycle dynamics? By Krause, Michael; Lubik, Thomas A.
  3. Non-parametric counterfactual analysis in dynamic general equilibrium By Felix Kubler; Karl Schmedders
  4. The Bank of Canada's Version of the Global Economy Model (BoC-GEM) By Rene Lalonde; Dirk Muir
  5. Wage-Directed Job Match with Multiple Applications and Multiple Vacancies: The Optimal Job Application Strategy and Wage Dispersion By Ken Hori
  6. Learning and Time-Varying Macroeconomic Volatility By Fabio Milani
  7. Welfare Effects of Housing Price Appreciation in an Economy With Binding Credit Constraints By Ashot Tsharakyan
  8. Income Growth in the 21st century : forecasts with an overlapping generations model By David, DE LA CROIX; FrŽdŽric DOCQUIER; Philippe, LIEGEOIS
  9. Essential Interest-Bearing Money By David Andolfatto
  10. Entrepreneurship, Wealth, Liquidity Constraints and Start-up Costs By Raquel Fonseca; Pierre-Carl Michaud; Thepthida Sopraseuth

  1. By: Krause, Michael; Lubik, Thomas A.
    Abstract: We show how on-the-job search and the propagation of shocks to the economy are intricately linked. Rising search by employed workers in a boom amplifies the incentives of firms to post vacancies. In turn, more vacancies induce more on-the-job search. By keeping job creation costs low for firms, on-the-job search greatly amplifies shocks. In our baseline calibration, this allows the model to generate fluctuations of unemployment, vacancies, and labor productivity whose magnitudes are close to the data, and leads output to be highly autocorrelated.
    Keywords: Search and matching, job-to-job mobility, worker flows, Beveridge curve, business cycle, propagation
    JEL: E24 E32 J64
    Date: 2007
  2. By: Krause, Michael; Lubik, Thomas A.
    Abstract: We analyse the implications of intra-firm bargaining for business cycle dynamics in models with large firms and search frictions. Intra-firm bargaining implies a feedback effect from the marginal revenue product to wage setting which leads firms to over-hire in order to reduce workers’ bargaining position within the firm. The key to this effect are decreasing returns and/or downward-sloping demand. We show that equilibrium wages and employment are higher in steady state compared to a bargaining framework in which firms neglect this feedback. However, the effects of intra-firm bargaining on adjustment dynamics, volatility and comovement are negligible.
    Keywords: Strategic wage setting, search and matching frictions, business cycle propagation
    JEL: E24 E32 J64
    Date: 2007
  3. By: Felix Kubler (Department of Economics, University of Pennsylvania); Karl Schmedders (Kellogg MEDS, Northwestern University)
    Abstract: In this paper we examine non-parametric restrictions on counterfactual analysis in a simple dynamic stochastic general equilibrium model. Under the assumption of time-separable expected utility and complete markets all equilibria in this model are stationary, the Arrow-Debreu prices uniquely reveal the probabilities and discount factor and the equilibrium correspondence defined as the map from endowments to stationary (probability-free) state prices, is identical to the equilibrium correspondence in a standard Arrow-Debreu exchange economy with additively separable utility. We examine observable restriction on this correspondence and give necessary as well as sufficient conditions on profiles of individual endowments that ensure that associated equilibrium prices cannot be arbitrary. While often there are restrictions on possible price changes we also show that in most cases results from a single agent economy do not carry over to a setting with heterogeneous agents.
    Keywords: Dynamic general equilibrium, non-parametric analysis, observable restrictions
    JEL: D50 G10
    Date: 2007–09–17
  4. By: Rene Lalonde; Dirk Muir
    Abstract: The Bank of Canada's version of the Global Economy Model (BoC-GEM) is derived from the model created at the International Monetary Fund by Douglas Laxton (IMF) and Paolo Pesenti (Federal Reserve Bank of New York and National Bureau of Economic Research). The GEM is a dynamic stochastic general-equilibrium model based on an optimizing representative-agent framework with balanced growth, and some additional features to help mimic the overlappinggenerations' class of models. Moreover, there is a concrete role for fiscal policy (albeit not fully optimized) and monetary policy. At the Bank, the model has been extended beyond the standard version with tradable and non-tradable goods sectors to include both oil and non-oil commodities. Furthermore, the oil sector is decomposed into oil for production and oil for retail consumption. The authors provide a detailed technical description of the model's structure and calibration. They also describe the model's simulation properties for Canadian and U.S. domestic shocks, and describe how the model can be used to analyze issues that currently are at the forefront for the Canadian and global economies, such as trade protectionism, global imbalances, and increasing oil prices.
    Keywords: Economic models; International topics; Business fluctuations and cycles
    JEL: C68 E27 E37 F32 F47
    Date: 2007
  5. By: Ken Hori (School of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: This paper develops a model of directed-search where workers’ preference for a higher wage is explicitly modelled into their application strategy. In a general setting where jobs offer non-uniform wages and different probabilities of a job offer, the optimal strategy for selecting the set of applied jobs is established. In applying this to a homogeneous-workers job-matching market, the equilibrium outcome is then shown to entail wage dispersion when firms have non-uniform labour demand. Finally a matching function is derived that captures both urnball and multiple-applications frictions, that nests many of the existing functions.
    JEL: J31 J64
    Date: 2007–09
  6. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper presents a DSGE model in which agents' learning about the economy can endogenously generate time-varying macroeconomic volatility. Economic agents use simple models to form expectations and need to learn the relevant parameters. Their gain coefficient is endogenous and is adjusted according to past forecast errors. The model is estimated using likelihood-based Bayesian methods. The endogenous gain is jointly estimated with the structural parameters of the system. The estimation results show that private agents appear to have often switched to constant-gain learning, with a high constant gain, during most of the 1970s and until the early 1980s, while reverting to a decreasing gain later on. As a result, the model can generate a pattern of volatility, which is increasing in the 1970s and falling in the second half of the sample, with a decline that can roughly match the magnitude of the Great Moderation. The paper also documents how a failure to incorporate learning into the estimation may lead econometricians to spuriously find time-varying volatility in the exogenous shocks, even when these have constant variance by construction.
    Keywords: Adaptive learning; Constant gain; Monetary policy; Macroeconomic volatility; Inflation dynamics
    JEL: C11 D84 E30 E50 E52 E58 E66
    Date: 2007–05
  7. By: Ashot Tsharakyan
    Abstract: This research analyzes the effects of recent housing price appreciation on aggregate welfare. It generalizes the results of Bajari et al (2005), who find that in a credit unconstrained economy with exogenous housing prices there is no effect of housing price appreciation on aggregate welfare. However, I demonstrate that if the households are credit-constrained and housing price is endogenous its appreciation implies a non-zero change in aggregate welfare. First, credit constraints are incorporated into Bajari et al’s model and it is shown that if they are binding housing price appreciation implies an improvement in aggregate welfare. I then construct a model where housing price appreciation is endogenous and is driven by demand and supplyside shocks. The supply shock results from a change in building permit cost. The demand shifts are generated based on dynamics of household income and interest rates. Both credit-constrained and unconstrained versions of this model are considered. Afterwards, using my theoretical results I calculate the aggregate welfare effects of housing price appreciation driven by the combination of demand-side and supply-side shocks observed in the US housing market from 1995 to 2004. The final result implies that housing price appreciation in 1995-2004 driven by the given combination of demand and supply-side shocks led to per household improvement of aggregate welfare by an amount equivalent to about 40% of mean household income in 2004.
    Keywords: Housing price appreciation, aggregate welfare, binding credit constraints, endogenous housing price, demand and supply side shocks, median household income.
    JEL: R2 R20 R21 R31
    Date: 2007–07
  8. By: David, DE LA CROIX (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics and CORE); FrŽdŽric DOCQUIER (FNRS and UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Philippe, LIEGEOIS (CEPS, INSTEAD, Luxemburg)
    Abstract: We forecast income growth over the periode 2000-2050 in the US, Canada, and France. To ground the forecasts on relationships that are as robust as possible t changes in the environment, we use a quantitative theoretical approach which consists in calibrating and simulating a general equilibrium model. Compared to existing studies to link taxes and public expenditures to demographic changes, and take into account the interaction between education and work experience. Forecasts show that growth will be weaker over the period 2010-2040. The gap between the US and the two other countries is increasing over time. France will catch-up and overtake Canada in 2020. Investigating alternative policy scenarios, we show that increasing the effective retirement age to 63 would be most profitable for France, reducing its gap with US by one third. A decrease in social security benefits would slightly stimulate growth but would have no real impact on the gap between the countries.
    Keywords: Aging, Forecast, Computable General Equilibrium, Education, Experience
    JEL: D58 E6 H55 J11 O40
    Date: 2007–09–29
  9. By: David Andolfatto (Simon Fraser University)
    Abstract: In this paper, I provide a rationale for why money should earn interest; or, what amounts to the same thing, why risk-free claims to non-interestbearing money should trade at discount. I argue that interest-bearing money is essential when individual money balances are private information. The analysis also suggests one reason for why it is sufficient (as well as necessary) for interest to be paid only on large money balances; or equivalently, why bonds need only be issued in large denominations.
    Date: 2007–09
  10. By: Raquel Fonseca; Pierre-Carl Michaud; Thepthida Sopraseuth
    Abstract: The authors study the effects of liquidity constraints and start-up costs on the relationship between wealth and the fraction of entrepreneurs in an economy. They develop a dynamic occupational choice model with endogenous wealth and entry into entrepreneurship. The model predicts that, with liquidity constraints, the probability of entering entrepreneurship is an increasing function of individual wealth while the introduction of start-up costs tends to flatten this relationship. The theoretical predictions can be tested on cross-sectional data with exogenous variation in liquidity constraints (e.g. access to credit) and business start-up costs. They use three highly comparable micro datasets (SHARE, ELSA and HRS) providing harmonized data on wealth and work status in 9 countries that characterized by very different levels of start-up costs and liquidity constraints. Their results support their theoretical predictions. While higher liquidity constraints yield a positive relationship with wealth profile for the fraction of workers in entrepreneurship, start-up costs weaken this relationship by depressing the marginal value of being an entrepreneur as a function of wealth. Countries with high start-up costs such as Italy, Spain and France have flatter wealth gradients.
    Keywords: entrepreneurship, wealth, liquidity constraints, start-up costs
    JEL: E20 D31 J62
    Date: 2007–05

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