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on Dynamic General Equilibrium |
| By: | Anna Pavlova; Roberto Rigobon |
| Abstract: | Recent evidence on the importance of cross-border equity flows calls for a rethinking of the standard theory of external adjustment. We introduce equity holdings and portfolio choice into an otherwise conventional open-economy dynamic equilibrium model. Our model is simple and admits a closed-form solution regardless of whether financial markets are complete or incomplete. We find that the excessive emphasis put in the literature on solving models with incomplete markets for the sole purpose of obtaining nontrivial implications for the current account is misplaced. We revisit the current debate on the relative importance of the standard vs. the capital-gains-based (or "valuation'') channels of the external adjustment and establish that in our framework they are congruent. Our model's implications are consistent with a number of intriguing stylized facts documented in the recent empirical literature. |
| JEL: | F31 F36 G12 G15 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13468&r=dge |
| By: | Nir Jaimovich; Sergio Rebelo |
| Abstract: | It is well known that the neoclassical model does not generate comovement among macroeconomic aggregates in response to news about future total factor productivity. We show that this problem is generally more severe in open economy versions of the neoclassical model. We present an open economy model that generates comovement both in response to sudden stops and to news about future productivity and investment-specific technical change. We find that comovement is easier to generate in the presence of weak short-run wealth effects on the labor supply, adjustment costs to labor, and/or investment, and whenever the real interest rate faced by the economy rises with the level of net foreign debt. |
| JEL: | F3 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13444&r=dge |
| By: | Olivier Cardi (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - [CNRS : UMR7017] - [Université Panthéon-Assas - Paris II]); Romain Restout (GATE - Groupe d'analyse et de théorie économique - [CNRS : UMR5824] - [Université Lumière - Lyon II] - [Ecole Normale Supérieure Lettres et Sciences Humaines]) |
| Abstract: | This contribution shows that the duration of a fisscal shock together with sectoral capital intensity matter in determining the dynamic and steady-state effects in an intertemporal-optimizing two-sector small open economy model. First, unlike a permanent shock, net foreign asset position always worsens in the long-run after a transitory fiscal expansion. Second, steady-state changes in physical capital depend on sectoral capital-labor ratios but their signs may be reversed compared to the corresponding permanent public policy. Third, investment and the current account may now adjust non monotonically. Fourth, a temporary fiscal shock always crowds-out (crowds-in) investment in the long-run whenever the non traded (traded) sector is more capital intensive. |
| Keywords: | current account; government spending; nontraded goods; temporary shocks |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00174574_v1&r=dge |
| By: | Fabbri, Giorgio; Iacopetta, Maurizio |
| Abstract: | We present an application of the Dynamic Programming (DP) and of the Maximum Principle (MP) to solve an optimization over time when the production function is linear in the stock of capital (Ak model). Two views of capital are considered. In one, which is embraced by the great majority of macroeconomic models, capital is homogeneous and depreciates at a constant exogenous rate. In the other view each piece of capital has its own finite productive life cycle (vintage capital). The interpretation of the time patterns of macroaggregates is quite different between the two cases. A technological shock generates an oscillatory movement in the time pattern of per capita output when capital has a vintage structure; conversely an instantaneous adjustment with no transitional dynamics occurs when capital is homogeneous. From a methodological point of view it emerges that the DP approach delivers sharper results than the MP approach (for instance it delivers a closed form solution for the optimal investment strategy) under slacker parameter restrictions. Cross-time and cross-country data on investments, income, and consumption drawn from the Penn World Table version 6.2 are used to evaluate the vintage and standard Ak model. |
| Keywords: | Vintage Capital; Penn World Table; Maximum Principle; Hilbert Space. |
| JEL: | E37 C61 E22 O47 O41 |
| Date: | 2007–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5115&r=dge |
| By: | Matthew Chambers; Carlos Garriga; Don E. Schlagenhauf |
| Abstract: | After three decades of being relatively constant, the homeownership rate increased over the 1994–2005 period to attain record highs. The objective of this paper is to account for the observed boom in ownership by examining the role played by changes in demographic factors and innovations in the mortgage market that lessened down payment requirements. To measure the aggregate and distributional impact of these factors, we construct a quantitative general equilibrium overlapping-generation model with housing. We find that the long-run importance of the introduction of new mortgage products for the aggregate homeownership rate ranges from 56 percent to 70 percent. Demographic factors account for between 16 percent and 31 percent of the change. Transitional analysis suggests that demographic factors play a more important but not dominant role farther from the long-run equilibrium. From a distributional perspective, mortgage market innovations have a larger impact on participation rate changes of younger households, and demographic factors seem to be the key to understanding the participation rate changes of older households. Our analysis suggests that the key to understanding the increase in the homeownership rate is the expansion of the set of mortgage contracts. We test the robustness of this result by considering changes in mortgage financing after World War II. We find that the introduction of the conventional fixed-rate mortgage, which replaced balloon contracts, accounts for at least 50 percent of the observed increase in homeownership during that period.y share constant actually decreases the output response. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2007-21&r=dge |
| By: | Marcos Antonio C. da Silveira |
| Abstract: | We build a two-country version of the DSGE model in Gali & Monacelli (2005), which extends for a small open economy the new Keynesain model used as tool for monetary policy analysis in closed economies. A distinctive feature of the model is that the terms of trade enters directly into the new Keynesian Phillips curve as a new pushing-cost variable feeding the inflation, so that there is no more the direct relationship between marginal cost and output gap that characterizes the closed economies. Unlike most part of the literature, we derive the small domestic open economy as a limit case of the two-coutry model, rather than assuming exogenous processes for the foreign variables. This procedure preserves the role played by foreign nominal frictions in the way as international monetary policy shocks are conveyed into the small domestic economy. Using the Bayesian approach, the small-economy case is estimated with Brazilian data and impulse-response functions are build to analyse the dynamic effects of structural shocks. |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:ipe:ipetds:1252&r=dge |
| By: | Montoro Carlos (Banco Central de Reserva del Perú and LSE); Moreno Eduardo (Banco Central de Reserva del Perú) |
| Abstract: | In this paper we extend the neoclassical model presented by Baxter and King (1993) to evaluate the effects of two alternative fiscal policy rules on the business cycle. The rules we analyze are similar to those implemented in practice by some countries, such as: limits to the structural fiscal deficit (which eliminates the effects of the business cycle on the government revenues) and limits to conventional fiscal deficit. We focus our analysis in a model calibrated to mimic Peruvian data to evaluate the short run dynamics and the conditions for the stability of the equilibrium. We find that the rule based on the structural balance generates a counter cyclical fiscal policy, which reduces significantly output volatility. Moreover, we find that a condition for a determinate equilibrium in the model endowed with the structural rule is that non-financial government expenditures react more than one–to-one to changes in interest expenditures. |
| Keywords: | Reglas Fiscales, Política fiscal, Volatilidad del Producto |
| JEL: | E62 H30 H60 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2007-011&r=dge |
| By: | Audrey Desbonnet (Centre d'Economie de la Sorbonne); Sumudu Kankanamge (Centre d'Economie de la Sorbonne) |
| Abstract: | This paper assesses the optimal level of public debt in a new framework where aggregate fluctuations are taken into account. Agents are subject to both aggregate and idiosyncratic shocks and the market structure prevents them from perfectly insuring against the risk. We find that the optimal level of debt is very different when aggregate risk is taken into account : a simple idiosyncratic model generates a quarterly optimal level of debt of 60 % of GDP, our benchmark model embedding aggregate risk finds the quarterly optimal level of debt to be 180 % of GDP, our benchmark model embedding aggregate risk finds the quarterly optimal level of debt to be 180 % of GDP. Thus aggregate fluctuations have a strong positive impact on the level of public debt in the economy. Aggregate fluctuations exacerbate the overall risk level in the economy and households are forced to increase their precautionary saving in response. Public debt and the implied higher interest rate generate a strong effect that helps precautionary saving behavior. |
| Keywords: | debt, aggregate risk, precautionary saving. |
| JEL: | E32 E63 H31 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:v07042&r=dge |
| By: | Schied, Alexander; Schöneborn, Torsten |
| Abstract: | We consider the finite-time optimal portfolio liquidation problem for a von Neumann-Morgenstern investor with constant absolute risk aversion (CARA). As underlying market impact model, we use the continuous-time liquidity model of Almgren and Chriss (2000). We show that the expected utility of sales revenues, taken over a large class of adapted strategies, is maximized by a deterministic strategy, which is explicitly given in terms of an analytic formula. The proof relies on the observation that the corresponding value function solves a degenerate Hamilton-Jacobi-Bellman equation with singular initial condition. |
| Keywords: | Liquidity; illiquid markets; optimal liquidation strategies; dynamic trading strategies; algorithmic trading; utility maximization |
| JEL: | G24 G20 G10 |
| Date: | 2007–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5075&r=dge |
| By: | Matthew Chambers; Carlos Garriga; Don Schlagenhauf |
| Abstract: | In this paper, we analyze various mortgage contracts and their implications for housing tenure and investment decisions using a model with heterogeneous consumers and liquidity constraints. We find that different types of mortgage contracts influence these decisions through three dimensions: the downpayment constraint, the payment schedule, and the amortization schedule. Contracts with lower downpayment requirements allow younger and lower income households to enter the housing market earlier. Mortgage contracts with increasing payment schedules increase the participation of first-time buyers, but can generate lower homeownership later in the life cycle. We find that adjusting the amortization schedule of a contract can be important. Mortgage contracts which allow the quick accumulation of home equity increase homeownership across the entire life cycle. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-040&r=dge |
| By: | Juan Carlos Conesa; Carlos Garriga |
| Abstract: | We examine the optimal policy response to a transitory demographic shock that affects negatively the financing of retirement pensions. In contrast to existing literature, we endogenously determine optimal policies rather than exploring implications of exogenous parametric policies. Our approach identifies optimal strategies of the social security administration to guarantee the financial sustainability of existing retirement pensions in a Pareto improving way. Hence, no cohort will pay the cost of the demographic shock. We find that the optimal strategy is based in the following ingredients: elimination of compulsory retirement, a change in the structure of labor income taxation and a temporary increase in the level of government debt. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-041&r=dge |