nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒12‒08
thirteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Business Cycle Accounting for the Japanese Economy Using the Parameterized Expectations Algorithm By INABA Masaru
  2. Endogenous Market Structure and the Business Cycle By Andrea Colciago; Federico Etro
  3. Collateralized capital and News-driven cycles By KOBAYASHI Keiichiro; NUTAHARA Kengo
  4. International frictions and optimal monetary policy cooperation - analytical solutions By Matthieu Darracq Pariès
  5. The transmission of domestic shocks in the open economy By Christopher J. Erceg; Christopher Gust; David Lopez-Salido
  6. Private Money and Bank Runs By Hongfei Sun; Xiuhua Huangfu
  7. An Endogenous Growth Model with Embodied Technical Change without Scale Effects By Bianco, Dominique
  8. The Friedman Rule in an Overlapping Generations Model: Social Security in Reverse By Benjamin Eden
  9. Banking, Inside Money and Outside Money By Hongfei Sun
  10. Monetary Policy Rules For Manging Aid Surges In Africa By Christopher Adam; Stephen O’Connell; Edward Buffie
  11. The yield curve and macroeconomic dynamics By Peter Hördahl; Oreste Tristani; David Vestin
  12. Credit and inflation under borrower’s lack of commitment By Antonia Diaz; Fernando Perera-Tallo
  13. Annuities and Aggregate Mortality Uncertainty By Justin van de Ven; Martin Weale

  1. By: INABA Masaru
    Abstract: We propose an application of the parameterized expectations algorithm (PEA) to business cycle accounting (BCA). The PEA has an advantage in that it is simple and easier to understand and implement than the other non-linear solution methods for the dynamic stochastic general equilibrium model. Moreover, we apply BCA to the Japanese economy using the PEA which relaxes the perfect foresight assumption and show that the result is similar to the main result in the deterministic BCA by Kobayashi and Inaba (2006). The effects of the investment wedge are not a significant cause of the persistent recession during the 1990s. The output due to the efficiency wedge roughly replicates actual output, while the discrepancy widened during the 1990s. The labor wedge had a large depressing effect on output during 1989-2005. The efficiency wedge explains the recent economic recovery.
    Date: 2007–11
  2. By: Andrea Colciago; Federico Etro
    Abstract: We introduce endogenous strategic interactions under competition in quantities and in prices together with endogenous entry in a dynamic stochastic general equilibrium model with ?exible prices. The endogenous mark ups depend on the form of competition and on the degree of substitutability between goods, and they vary countercylically while pro?ts are procyclical. Positive temporary shocks to productivity and government spending attract entry. Entry strengthens competition between ?rms, which temporary reduces mark ups and prices: this creates an intertemporal substitution e¤ect which provides an extra boost to consumption. The model outperforms the standard RBC framework in matching impulse response functions and second moments for US data.
    Keywords: Endogenous Market Structure, Firms?Entry, Business Cycle
    JEL: L11 E32
    Date: 2007–11
  3. By: KOBAYASHI Keiichiro; NUTAHARA Kengo
    Abstract: Kobayashi, Nakajima, and Inaba (2007) show that in the neoclassical business cycle models with collateral constraints, a boom can be generated in response to an optimistic change in expectations on the future state of the economy. They call this business cycle a news-driven cycle. In their models, land is used as collateral, and borrowing for working capital is limited by the value of collateralized land. We simplify their model to one without land. We show that in an economy where capital goods are used as collateral, news-driven cycles can be generated.
    Date: 2007–12
  4. By: Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper analyzes the implications of price-setting and incomplete financial markets for optimal monetary cooperation. The main objective is to provide the basic intuitions concerning the role of the main international frictions on optimal policy within a simple Dynamic Stochastic General Equilibrium model. We concentrate on a symmetric two-country DSGE with home bias, incomplete financial markets internationally and imperfect competition together with nominal price rigidities in which the export prices can be denominated either in the producer currency (PCP) or in the consumer currency (LCP). In addition, the model can account both for efficient and inefficient shocks. Our main results are derived in polar cases with efficient steady state and for which the design of the optimal policy is specifically illustrative and can be expressed in terms of targeting rules. In particular, the paper gives some new insights on the optimal exchange rate regime given the structure of shocks and the exchange rate pass-through, as well as on the optimal stabilization of CPI and PPI inflation. We also put into perspective the implication of financial autarky on the optimal management of international spillovers. JEL Classification: E5, F4.
    Keywords: DSGE models, optimal monetary policy, new open economy macroeconomics.
    Date: 2007–11
  5. By: Christopher J. Erceg; Christopher Gust; David Lopez-Salido
    Abstract: This paper uses an open economy DSGE model to explore how trade openness affects the transmission of domestic shocks. For some calibrations, closed and open economies appear dramatically different, reminiscent of the implications of Mundell-Fleming style models. However, we argue such stark differences hinge on calibrations that impose an implausibly high trade price elasticity and Frisch elasticity of labor supply. Overall, our results suggest that the main effects of openness are on the composition of expenditure, and on the wedge between consumer and domestic prices, rather than on the response of aggregate output and domestic prices.
    Date: 2007
  6. By: Hongfei Sun (Queen's University); Xiuhua Huangfu (University of Sydney)
    Abstract: This paper studies bank runs in a model with coexistence of fiat money and private money. When fiat money is the only medium of exchange, there exist a bank run equilibrium and an equilibrium that achieves the optimal risk sharing. In contrast, when private money is also a medium of exchange, there exists a unique equilibrium where no one demands early withdrawals of fiat money and agents in need of liquidity only use private money to finance consumption. The unique equilibrium achieves the first-best outcome and eliminates bank runs without having resort to any government intervention.
    Keywords: private money, fiat money, bank runs
    JEL: E4 G2
    Date: 2007–12
  7. By: Bianco, Dominique
    Abstract: In this paper, we extend the Romer (1990) model by intro- ducing an embodied technological change and by removing the scale effects. We show that this model can still generate steady state growth in which the embodied technical change has an positive and permanent effect on growth in the long-run.
    Keywords: Endogenous growth; Information technology; Embodied tech- nical change; Scale effects
    JEL: O41 O31
    Date: 2007–11–10
  8. By: Benjamin Eden (Department of Economics, Vanderbilt University)
    Abstract: The welfare gains from adopting a zero nominal interest policy depend on the implementation details. Here I focus on a government loan program that crowds out lending and borrowing and other money substitutes. Since money can be costlessly created the resources spent on creating money substitutes are a "social waste". Moving from an economy with strictly positive nominal interest rate to an economy with zero nominal interest rate will increase consumption by the amount of resources spent on lending and borrowing. But in general welfare will increase by more than that because consumption smoothing is better under zero nominal interest rate.
    Keywords: Welfare cost of inflation, money substitutes, wealth redistribution, Friedman rule
    JEL: E42 E51 E52 E58 H20 H21 H26
    Date: 2007–11
  9. By: Hongfei Sun (Queen's University)
    Abstract: This paper presents an integrated theory of money and banking. I address the following question: when both individuals and banks have private information, what is the optimal way to settle debts? I develop a dynamic model with micro-founded roles for banks and a medium of exchange. I establish two main results: first, markets can improve upon the optimal dynamic contract at the presence of private information. Market prices fully reveal the aggregate states and help solve the incentive problem of the bank. Secondly, it is optimal for the bank to require loans be settled with short-term inside money, i.e., bank money that expires immediately after the settlement of debts. Short-term inside money makes it less costly to induce truthful revelation and achieve more efficient risk sharing.
    Keywords: banking, inside money, outside money
    JEL: E4 G2
    Date: 2007–12
  10. By: Christopher Adam (University of Oxford); Stephen O’Connell (Swarthmore College); Edward Buffie (Indiana University; International Monetary Fund)
    Abstract: We examine the properties of alternative monetary policy rules in response to large aid surges in low-income countries characterized by incomplete capital market integration and currency substitution. Using a dynamic stochastic general equilibrium model, we show that simple monetary rules that stabilize the path of expected future seigniorage for a given aid flow have attractive properties relative to a range of conventional alternatives including those involving heavy reliance on bond sterilization or a commitment to a pure exchange rate float. These simple rules, which are shown to be robust across a range of fiscal responses to aid inflows, appear to be consistent with actual responses to recent aid surges in a range of post-stabilization countries in Sub-Saharan Africa.
    Keywords: Basle Committee, capital adequacy, financial governance, financial architecture, financial reform, international standards, capital flows, poor countries, cost of capital, international development
    Date: 2007–02
  11. By: Peter Hördahl (Bank for International Settlements (BIS), Centralbahnplatz 2, CH-4002 Basel, Switzerland.); Oreste Tristani (Corresponding author, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); David Vestin (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We show that microfounded DSGE models with nominal rigidities can be successful in replicating features of bond yield data which have previously been considered puzzling in general equilibrium frameworks. Consistent with empirical evidence, we obtain average holding period returns that are positive, increasing in maturity and sizable, as well as long-maturity bond yields that are almost as volatile as short-term interest rates. At the same time, we are able to fit sample moments of consumption and inflation relatively well. To improve our understanding of these results, we derive analytical solutions for yields that are valid up to a second order approximation and generally applicable, We demonstrate that the improved model performance does not arise directly from the presence of nominal rigidities: ceteris paribus, the introduction of sticky-prices in a simple model tend to reduce premia. Sticky prices help indirectly because they imply (short-run) monetary non-neutrality, so that the policy rule followed by the central bank affects consumption dynamics and the pricing of yields. A very high degree of “interest rate smoothing” in the policy rule is essential for our results. JEL Classification: E43, E44.
    Keywords: DSGE models, policy rules, term structure of interest rates, risk premia, second order approximations.
    Date: 2007–11
  12. By: Antonia Diaz; Fernando Perera-Tallo
    Abstract: Here we investigate the existence of credit in a cash-in-advance economy where there are complete markets but for the fact that agents cannot commit to repay their debts. Defectors are banned from the credit market but they can use money balances for saving purposes. Without uncertainty, deflation crowds out credit completely. The equilibrium allocation, however, is efficient if the government deflates at the time preference rate. Efficiency can also be restored with positive inflation. For any non negative inflation rate below the optimal level, the volume of credit and the real interest rate increase with inflation. Our results hold when idiosyncratic uncertainty is introduced and households are sufficiently impatient but in one instance: efficiency cannot be restored if the deflation rate is nearby the rate of time preference. Our numerical examples suggest that the optimal inflation rate is not too large for reasonable levels of patience and risk aversion. Finally, we present a framework where the use of money arises endogenously and show that it is tantamount to our cash-in-advance framework. Our results hold in this modified environment.
    Date: 2007–11
  13. By: Justin van de Ven (National Institute of Economic and Social Research); Martin Weale (National Institute of Economic and Social Research)
    Abstract: This paper explores the effect of aggregate mortality risk on thepricing of annuities. It uses a two-period model; in the second period people face a constant but intiially unknown risk of death. Old people can either carry the aggregat emortlaity risk for themselves or buy annuities which are sold by young people. A market-clearing price for such annuties is established. It is found that old people would, given the choice, decide to carry a considerable part of aggregate mortality risk for themselves.
    Date: 2007–03

This nep-dge issue is ©2007 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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