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on Dynamic General Equilibrium |
| By: | Aubhik Khan; Julia K. Thomas |
| Abstract: | The authors study a model of lumpy investment wherein establishments face persistent shocks to common and plant-specific productivity, and nonconvex adjustment costs lead them to pursue generalized (S,s) investment rules. They allow persistent heterogeneity in both capital and total factor productivity alongside low-level investments exempt from adjustment costs to develop the first model consistent with the cross-sectional distribution of establishment investment rates. Examining the implications of lumpy investment for aggregate dynamics in this setting, the authors find that they remain substantial when factor supply considerations are ignored, but are quantitatively irrelevant in general equilibrium. ; The substantial implications of general equilibrium extend beyond the dynamics of aggregate series. While the presence of idiosyncratic shocks makes the time-averaged distribution of plant-level investment rates largely invariant to market-clearing movements in real wages and interest rates, the authors show that the dynamics of plants' investments differ sharply in their presence. Thus, model-based estimations of capital adjustment costs involving panel data may be quite sensitive to the assumption about equilibrium. Their analysis also offers new insights about how nonconvex adjustment costs influence investment at the plant. When establishments face idiosyncratic productivity shocks consistent with existing estimates, they find that nonconvex costs do not cause lumpy investments, but act to eliminate them. |
| Keywords: | Investments |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:07-24&r=dge |
| By: | Alain Gabler; Omar Licandro |
| Abstract: | A simple dynamic general equilibrium model is set up in which firms face idiosyncratic productivity shocks. Firms whose productivity has fallen too low exit, and entrants try to imitate the best practice of existing firms, so that the expected productivity of entering firms is a function of current average productivity. Because of the resulting selection and imitation process, aggregate productivity grows endogenously. When calibrated to U.S. data, the model suggests that around one-fifth of productivity growth is due to such a selection and imitation effect. |
| Keywords: | endogenous growth; selection; imitation; firm entry and exit |
| JEL: | B52 O3 O41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2007/26&r=dge |
| By: | Gianni Amisano (European Central Bank, University of Brescia and The Rimini Centre for Economics Analysis, Rimini, Italy.); Oreste Tristani (European Central Bank.) |
| Abstract: | We estimate the approximate nonlinear solution of a small DSGE model on euro area data, using the conditional particle …lter to compute the model likelihood. Our results are consistent with previous …ndings, based on simulated data, suggesting that this approach delivers sharper inference compared to the estimation of the linearised model. We also show that the nonlinear model can account for richer economic dynamics: the impulse responses to structural shocks vary depending on initial conditions selected within our estimation sample. |
| Keywords: | DSGE models, in‡ation persistence, second order approximations, sequential Monte Carlo, Bayesian estimation. |
| JEL: | C11 C15 E31 E32 E52 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:18-07&r=dge |
| By: | Emine Boz |
| Abstract: | Emerging market financial crises are abrupt and dramatic, usually occurring after a period of high output growth, massive capital flows, and a boom in asset markets. This paper develops an equilibrium asset-pricing model with informational frictions in which vulnerability and the crisis itself are consequences of the investor optimism in the period preceding the crisis. The model features two sets of investors, domestic and foreign. Both sets of investors learn from noisy signals, which contain information relevant for asset returns and formulate expectations, or "beliefs," about the state of productivity. We show that, if preceded by a sequence of positive signals, a small, negative noise shock can trigger a sharp downward adjustment in investors' beliefs, asset prices, and consumption. The magnitude of this downward adjustment and sensitivity to negative signals increase with the level of optimism attained prior to the negative signal. |
| Keywords: | Working Paper , Financial crisis , Emerging markets , Investment , Foreign investment , Consumption , Asset prices , Economic models , |
| Date: | 2007–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/223&r=dge |
| By: | Godfrey Keller; Kevin Roberts; Margaret Stevens |
| Abstract: | We construct an equilibrium random matching model of the labour market, with endogenous market participation and a general matching technology that allows for market size effects: the job-finding rate for workers and the incentives for participation change with the level of unemployment. In comparison to standard models with constant returns to scale in matching, agent behaviour is more complex - the model generates plausible joint dynamics of employment, unemployment and participation with heterogeneity in search behaviour for workers with different degrees of attachment to the labour market. Techniques are developed to reduce the dimensionality of the problem to establish local and global stability; a complicating factor is the possibility of multiple equilibria, welfare-ranked by market size. A Hosios-type condition internalises search externalities. |
| Keywords: | Unemployment, Participation, Job Search, Matching Function, Returns to Scale, Multiple Equilibria, Stability, Coordination, Search Externalities |
| JEL: | J41 J64 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:362&r=dge |
| By: | Alain Gabler |
| Abstract: | The counter-cyclicality in the relative price of equipment investment which is observed in the U.S. has been attributed to equipment-specific productivity shocks. Cross-country evidence indicates that a number of countries experience sizeable delays between a surge in equipment production and a fall in its relative price, which is difficult to reconcile with sector-specific shocks. I show that in the presence of sector specific, time-varying markups, relative price movements arise as a direct consequence of consumption smoothing, even if all shocks are aggregate, while barriers to firm entry lead to delays in relative price responses. A calibrated version of the model explains around one-third of the relative price fluctuations which are observed in the U.S., as well as the qualitative differences in the behaviour of this relative price across countries. |
| Keywords: | endogenous markups; firm entry and exit; relative prices |
| JEL: | E25 E32 D43 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2007/25&r=dge |
| By: | Brad Baxter (School of Economics, Mathematics & Statistics, Birkbeck); Liam Graham; Stephen Wright (School of Economics, Mathematics & Statistics, Birkbeck) |
| Abstract: | We relax the assumption of full information that underlies most dynamic general equilibrium models, and instead assume agents optimally form estimates of the states from an incomplete information set. We derive a version of the Kalman filter that is endogenous to agents' optimising decisions, and state conditions for its convergence. We show the (restrictive) conditions under which the endogenous Kalman filter will at least asymptotically reveal the true states. In general we show that incomplete information can have signi?cant implications for the time-series properties of economies. We provide a Matlab toolkit which allows the easy implementation of models with incomplete information. |
| Keywords: | Dynamic general equilibrium, Kalman filter, imperfect information, signal extraction |
| JEL: | E27 E37 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0719&r=dge |
| By: | Ruy Lama; Juan Pablo Medina |
| Abstract: | This paper studies optimal monetary policy in a two-sector small open economy model under segmented asset markets and sticky prices. We solve the Ramsey problem under full commitment, and characterize the optimal monetary policy in a calibrated version of the model. The findings of the paper are threefold. First, the Ramsey solution mimics the allocations under flexible prices. Second, under the optimal policy the volatility of non-tradable inflation is close to zero. Third, stabilizing nontradable inflation is optimal regardless of the financial structure of the small open economy. Even for a moderate degree of price stickiness, implementing a monetary policy that mitigates asset market segmentation is highly distortionary. This last result suggests that policymakers should resort to other policy instruments in order to correct financial imperfections. |
| Keywords: | Working Paper , Monetary policy , Prices , Financial assets , Markets , Economic models , |
| Date: | 2007–09–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/217&r=dge |
| By: | Chu, Angus C. |
| Abstract: | Is the patent length an effective policy instrument in stimulating R&D? This paper develops a generalized variety-expanding growth model and then calibrates the model to the aggregate data of the US economy to analyze the effects of extending the patent length. The numerical exercise suggests that at the empirical range of patent-value depreciation rates, extending the patent length beyond 20 years leads to only a very small increase in R&D despite R&D underinvestment in the market economy. On the other hand, shortening the patent length can lead to a significant reduction in R&D and consumption. This paper also makes use of the dynamic general-equilibrium framework to examine the fraction of total factor productivity (TFP) growth that is driven by R&D, and the calibration exercise suggests that about 35% to 45% of the long-run TFP growth in the US is driven by R&D. Finally, this paper identifies and analytically derives a dynamic distortion of the patent length on saving and investment in physical capital that has been neglected by previous studies, which consequently underestimate the distortionary effects of patent protection. |
| Keywords: | endogenous growth; intellectual property rights; patent length; R&D |
| JEL: | O34 O31 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5476&r=dge |
| By: | Juergen Jung (Indiana University Bloomington); Chung Tran (Indiana University Bloomington) |
| Abstract: | We analyze whether a consumer driven health care plan like the newly established Health Savings Accounts (HSAs) can reduce health care expenditures in the United States and increase the fraction of the population with health insurance. We use an overlapping generations model with health uncertainty and endogenous health care spending. Agents can choose between a low deductible- and a high deductible health insurance. If agents choose to purchase the high deductible health insurance, they are allowed to contribute tax free to an HSA. We examine the steady state effects of introducing HSAs into a system with private health insurance for young agents and Medicare for old agents. Since the model is a general equilibrium model, we fully account for feedback effects from both, factor markets and insurance markets. Our results from numerical simulations indicate that HSAs can decrease total health expenditures by up to 3% of GDP but increase the number of uninsured individuals by almost 5%. Furthermore, HSAs decrease the aggregate level of health capital and therefore decrease output. We also address possible extensions of the HSA reform that include the eligibility to pay health insurance premiums with HSA funds, the full privatization of Medicaid via HSAs, and Medicare for workers. |
| Keywords: | Health Savings Accounts |
| JEL: | H51 I18 I38 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2007023&r=dge |
| By: | Giulio Fella (Queen Mary, University of London, UK and The Rimini Centre for Economics Analysis, Rimini, Italy.); Giovanni Gallipoli (University of British Columbia, Canada.) |
| Abstract: | In this paper we ask whether policies targeting a reduction in crime rates through changes in education outcomes can be considered an effective and cost-viable alternative to interventions based on harsher punishment alone. In particular we study the effect of subsidizing high school completion. Most econometric studies of the impact of crime policies ignore equilibrium effects and are often reduced-form. This paper provides a framework within which to study the equilibrium impact of alternative policies. We develop an overlapping generation, life-cycle model with endogenous education and crime choices. Education and crime depend on different dimensions of heterogeneity, which takes the form of differences in innate ability and wealth at birth as well as employment shocks. PSID, NIPA and CPS data are used to estimate the parameters of a production function with different types of human capital and to approximate a distribution of permanent heterogeneity. These estimates are used to pin down some of the modelÕs parameters. The model is calibrated to match education enrolments, aggregate (property) crime rate and some features of the wealth distribution. In our numerical experiments we find that policies targeting crime reduction through increases in high school graduation rates are more cost-effective than simple incapacitation policies. Furthermore, the cost-effectiveness of high school subsidies increases significantly if they are targeted at the wealth poor. We also find that financial incentives to high school graduation have radically different implications in general and partial equilibrium (i.e. the scale of the programmes can substantially change its outcomes). |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:15-07&r=dge |
| By: | Thomas Philippon |
| Abstract: | I study the allocation of human capital in an economy with production externalities, financial constraints and career choices. Agents choose to become entrepreneurs, workers or financiers. Entrepreneurship has positive externalities, but innovators face borrowing constraints and require the services of financiers in order to invest efficiently. When investment and education subsidies are chosen optimally, I find that the financial sector should be taxed in exactly the same way as the non-financial sector. When direct subsidies to investment and scientific education are not feasible, giving a preferred tax treatment to the financial sector can improve welfare by increasing aggregate investment in research and development. |
| JEL: | E2 G18 G2 H2 O3 O41 O43 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13560&r=dge |
| By: | Maoz, Yishay |
| Abstract: | Since 1950, the quantity of working hours has been decreasing over time both in the U.S. and in the main European economies. The European economies have started this mutual decline process with longer working hours than in the U.S., but have ended it with less working hours than the U.S. This article presents a model in which this dynamic pattern for the joint dynamics of their working hours is shared by two economies that differ only in the weight that their individuals put on leisure in their utility function and are identical in every other respect. |
| Keywords: | Working hours; Economic Growth |
| JEL: | O40 J22 |
| Date: | 2007–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5467&r=dge |
| By: | Jean-Pierre DANTHINE; John B. DONALDSON |
| Abstract: | We study the dynamic general equilibrium of an economy where risk averse shareholders delegate the management of the firm to risk averse managers. The optimal contract has two main components: an incentive component corresponding to a non-tradable equity position and a variable 'salary' component indexed to the aggregate wage bill and to aggregate dividends. Tying a manager's compensation to the performance of her own firm ensures that her interests are aligned with the goals of firm owners and that maximizing the discounted sum of future dividends will be her objective. Linking managers' compensation to overall economic performance is also required to make sure that managers use the appropriate stochastic discount factor to value those future dividends. |
| Keywords: | incentives; optimal contracting; stochastic discount factor |
| JEL: | E32 E44 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:07.10&r=dge |
| By: | Thorsten Koeppl; Cyril Monnet; Ted Temzelides |
| Abstract: | The authors study the design of efficient intertemporal payment arrangements when the ability of agents to perform certain welfare-improving transactions is subject to random and unobservable shocks. Efficiency is achieved via a payment system that assigns balances to participants, adjusts them based on the histories of transactions, and periodically resets them through settlement. Their analysis addresses two key issues in the design of actual payment systems. First, efficient use of information requires that agents participating in transactions that do not involve monitoring frictions subsidize those that are subject to such frictions. Second, the payment system should explore the trade-off between higher liquidity costs from settlement and the need to provide intertemporal incentives. In order to counter a higher exposure to default, an increase in settlement costs implies that the volume of transactions must decrease, but also that the frequency of settlement must increase. |
| Keywords: | Payment systems |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:07-22&r=dge |