nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒12‒15
thirteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. The Shimer Puzzle and the Correct Identification of Productivity Shocks By Régis Barnichon
  2. On the Ramsey Equilibrium with heterogeneous consumers and endogenous labor supply By Stefano Bosi; Thomas Seegmuller
  3. The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer? By Christopher A. Pissarides
  4. Productivity, Aggregate Demand and Unemployment Fluctuations By Régis Barnichon
  5. Creative Destruction with On-the-Job Search By Jean-Baptiste Michau
  6. Asset Pricing with Heterogeneous Agents, Incomplete Markets and Trading Constraints By Tsvetanka Karagyozova
  7. Capital-labor Substitution and Endogenous Fluctuations: a Monopolistic Competition<br />Approach with Variable Mark-up By Thomas Seegmuller
  8. Technology Shocks and Asset Price Dynamics: The Role of Housing in General Equilibrium By Yoshida, Jiro
  9. "A One-Sector Neoclassical Growth Model with Endogenous Retirement" By Kiminori Matsuyama
  10. Coordination Failure in Technological Progress, Economic Growth and Volatility By Mei Li
  11. Estimating heterogeneous costs of participation in the risky asset markets By Graciela Sanromán
  12. Competition and Growth in an Endogenous Growth Model with Expanding Product Variety without Scale Effects By Bianco, Dominique
  13. Business Cycles and Growth: A Survey By Paul Gaggl; Sandra Steindl

  1. By: Régis Barnichon
    Abstract: Shimer (2005a) claims that the Mortensen-Pissarides search model of unemployment lacks anampiflication mechanism because it cannot generate the observed business cycle fluctuationsin unemployment given labor productivity shocks of plausible magnitude. This paper arguesthat part of the problem lies with the correct identification of productivity shocks. Because ofthe endogeneity of measured labor productivity, filtering out the trend component as inShimer (2005a) may not correctly identify the shocks driving unemployment. Using a New-Keynesian framework with search unemployment, this paper estimates that close to 50% ofthe Shimer puzzle is due to the misidentification of productivity shocks. In addition, I showthat extending the search model with an aggregate demand side remarkably improves theability of the standard search model to match the moments of key labor market variables.
    Keywords: unemployment fluctuations, labor productivity, search and matching model, New-Keynesian model
    JEL: E32 E37 J63 J64
    Date: 2007–08
  2. By: Stefano Bosi (EQUIPPE - Département d'Economie - Université des Sciences et Technologie de Lille - Lille I, EPEE - Université d'Evry-Val d'Essonne); Thomas Seegmuller (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: In this paper, we address the stability issue, stressing the role of labor supply, in a Ramsey model with heterogeneous households subject to borrowing constraints. Making labor supply endogenous leads us to prove the existence of two kinds of steady state : the one where everybody supplies labor, the other where only the most patient agent refrains from working. Focusing on the latter and going beyond models with inelastic labor supply, we show how preferences of impatient agents affect the saddle-path stability and the occurence of endogenous cycles. When their elasticity of intertemporal substitution in consumption exceeds one, instability and cycles are less likely, requiring lower degrees of capital- labor substitution. Conversely, elasticity values below one promote the emergence of fluctuations.
    Keywords: Saddle-path stability, endogenous cycles, heterogeneous agents, endogenous labor supply, borrowing constraint.
    Date: 2007–06
  3. By: Christopher A. Pissarides
    Abstract: I study the cyclical behavior of an equilibrium search model with endogenous job creationand destruction, with focus on the model's failure to match the observed cyclical volatility ofunemployment. Job creation in the model is influenced by wages in new matches. Isummarize microeconometric evidence on wages in new matches and show that the keymodel elasticities are consistent with the evidence. Therefore explanations of theunemployment volatility puzzle have to preserve the cyclical volatility of wages. I discusssome extensions of the model that can increase cyclical unemployment volatility throughmechanisms other than wage stickiness.
    Keywords: wages, unemployment, wage stickiness, job creation
    JEL: J63 J64 E3
    Date: 2007–11
  4. By: Régis Barnichon
    Abstract: This paper presents new empirical evidence on the cyclical behavior of US unemploymentthat poses a challenge to standard search and matching models. The correlation betweencyclical unemployment and the cyclical component of labor productivity switched sign at thebeginning of the Great Moderation in the mid 80s: from negative it became positive, whilestandard search models imply a negative correlation. I argue that the inconsistency arisesbecause search models do not allow output to be demand determined in the short run. Ipresent a search model with nominal rigidities that can rationalize the empirical findings, andI document two new facts about the Great Moderation that can account for the large and swiftincrease in the unemployment-productivity correlation in the mid-80s.
    Keywords: Unemployment Fluctuations, Labor productivity, Search and matching model, New-Keynesian model
    JEL: J64 E32 E37 E52
    Date: 2007–08
  5. By: Jean-Baptiste Michau
    Abstract: This paper is about the labour market consequences of creative destruction with on-the-jobsearch. We consider a matching model in an economy with embodied technological progressand show that its dynamics are profoundly affected by allowing on-the-job search. We obtainthat the elasticity of unemployment with respect to growth shrinks from 1.63 to 0.13.Moreover, the underlying transmission channels change as the flow of obsolete jobspractically disappears and is replaced by a flow of job-to-job transitions. These effects persisteven if employed job seekers are significantly less efficient in the search process than theunemployed. Thus, we show that, rather than contributing to unemployment, creativedestruction induces a direct reallocation of workers from low to high productivity jobs. Theseresults could be strengthened by assuming that search efforts are unobservable by firmswhich induces more on-the-job search. However, the action of worker is no longer surplusmaximizing and, hence, the worker's welfare is increasing in the cost of search which acts asa commitment device. Finally, we show that the model could be extended by allowing forvariable search intensity.
    Keywords: commitment device, creative destruction, job flows, obsolescence, on-the-jobsearch, search equilibrium, unemployment
    JEL: E24 J41 J63 J64 O39
    Date: 2007–11
  6. By: Tsvetanka Karagyozova (University of Connecticut and University of British Columbia)
    Abstract: The consumption capital asset pricing model is the standard economic model used to capture stock market behavior. However, empirical tests have pointed out to its inability to account quantitatively for the high average rate of return and volatility of stocks over time for plausible parameter values. Recent research has suggested that the consumption of stockholders is more strongly correlated with the performance of the stock market than the consumption of non-stockholders. We model two types of agents, non-stockholders with standard preferences and stock holders with preferences that incorporate elements of the prospect theory developed by Kahneman and Tversky (1979). In addition to consumption, stockholders consider fluctuations in their financial wealth explicitly when making decisions. Data from the Panel Study of Income Dynamics are used to calibrate the labor income processes of the two types of agents. Each agent faces idiosyncratic shocks to his labor income as well as aggregate shocks to the per-share dividend but markets are incomplete and agents cannot hedge consumption risks completely. In addition, consumers face both borrowing and short-sale constraints. Our results show that in equilibrium, agents hold different portfolios. Our model is able to generate a time-varying risk premium of about 5.5% while maintaining a low risk free rate, thus suggesting a plausible explanation for the equity premium puzzle reported by Mehra and Prescott (1985).
    Keywords: asset pricing, equity premium puzzle, prospect theory, heterogeneous agents
    JEL: G12 E44
    Date: 2007–11
  7. By: Thomas Seegmuller (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Ecole d'économie de Paris - Paris School of Economics - Université Panthéon-Sorbonne - Paris I)
    Abstract: In macroeconomics, economists introduce most frequently imperfect competition on product markets using the Dixit and Stiglitz (1977) monopolistic competition model. However, by assumption, this framework ignores one important feature of imperfect competition: strategic interactions between producers. Taking into account this remark and following Yang and Hejdra (1993), this paper analyzes an overlapping generations model where strategic interactions between producers are introduced and examines how they affect the stability properties of the steady state. Because of free entry, strategic interactions between producers imply a new dynamic feature, mark-up variability, promoting indeterminacy and endogenous cycles. Indeed, in contrast to the model without strategic interaction, endogenous fluctuations can occur when the substitution between the production factors, capital and labor, is not too weak, but in accordance with empirical estimates.
    Keywords: Endogenous fluctuations ; imperfect competition ; strategic interactions ; mark-up variability ; capital-labor substitution ; overlapping generations
    Date: 2007–12–06
  8. By: Yoshida, Jiro
    Abstract: A general equilibrium model, that incorporates endogenous production and local housing markets, is developed in order to explain the price relationship among human capital, housing, and stocks, and to uncover the role of housing in asset pricing. Housing serves as an asset as well as a durable consumption good. It is shown that housing market conditions critically affect asset price correlations and risk premia. The first result is that the covariation of housing prices and stock prices can be negative if land supply is elastic. Data from OECD countries roughly support the model's predictions on the relationship among land supply elasticity, asset price correlations, and households' equity holdings. The second result is that housing rent growth serves as a risk factor in the pricing kernel. The risk premium becomes higher as land supply becomes inelastic and as housing services become more complementary with other goods. Finally, the housing component in the pricing kernel is shown to mitigate the equity premium puzzle and the risk-free rate puzzle.
    Keywords: General equilibrium; asset pricing; housing; the equity premium puzzle
    JEL: R30 G12 E32 R20
    Date: 2007–12–13
  9. By: Kiminori Matsuyama (Department of Economics, Northwestern University)
    Abstract: This paper extends Diamond's OG model by allowing the agents to make the retirement decision. Earning a higher wage income when young not only enables the agents to save more. It also induces more agents to retire early and gives an additional incentive to save more for retirement. This leads to a higher capitallabor ratio in the following period, and hence the next generation of agents earns a higher wage income when young. Due to this positive feedback mechanism, endogenous retirement magnifies the persistence of growth dynamics and even generates multiple steady states for empirically plausible parameter values.
    Date: 2007–12
  10. By: Mei Li (Queen's University)
    Abstract: Technological progress has long been posited to be crucial in a country's economic growth. This paper argues that coordination failure in a country's new technology investment can be one of the barriers in a country's capital Accumulation and economic growth. The global game established by Morris and Shin(2000) is extended to a two-sector Overlapping Generation model where capital goods can be produced by two different technologies. The first is a conventional technology with constant returns, which are perfectly revealed to economic agents. The second is a new technology exhibiting increasing return to scale due to technological externalities, whose returns economic agents only have incomplete information about. Economic agents have to choose which technology to invest. My model reveals that under certain circumstances coordination failure in the capital good sector will occur and be manifested as the under-investment in the new technology. In this way, I explain how coordination failure in a country's technology updating process leads to slower capital accumulation and economic growth. More interestingly, the model generates a positive correlation between economic growth and volatility through a new channel associated with coordination failure. Policy implications are discussed as well.
    Keywords: Economic Growth, Technological externalities, Coordination Failure
    JEL: D82 D9
    Date: 2007–10
  11. By: Graciela Sanromán (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República; CEMFI)
    Abstract: This paper develops and estimates a dynamic structural model of participation in the risky financial asset markets using household level panel data. We specify a simple economic model in order to capture the portfolio choice over the life cycle. We solve the model using numerical techniques. Then we embed the optimal solution into the statistical (auxiliary) model and estimate the structural parameters using Generalized Indirect Inference. This paper focuses on the estimation of the non proportional costs to participate in the risky asset markets. We consider heterogeneous costs among education groups. We find that participation costs in the risky asset markets are positive and significant. We also conclude that they vary a lot among education groups.
    Keywords: Portfolio choice, dynamic programming, indirect inference
    JEL: C15 C61 D14 D91 G11
    Date: 2007–06
  12. By: Bianco, Dominique
    Abstract: The aim of this paper is to analyse the relationship between competition and growth in an endogenous growth model with expanding product variety without scale effect. In order to do this, we develop an extension of the Bucci (2005) model in which we eliminate the scale effects. We find that the relationship between competition and growth is always inverted U shaped. We explain this result by the composition of two effects on growth : resource allocation and profit incentive effects. For low values of product market competition, an increase of competition has an positive effect on growth. For large values of competition, we have a negative relationship between competition and growth.
    Keywords: Endogenous Growth; Horizontal Differentiation; Technological Change; Imperfect Competition
    JEL: O41 O31
    Date: 2007–11–10
  13. By: Paul Gaggl; Sandra Steindl (WIFO)
    Abstract: The paper surveys the evolution of modern macroeconomic models with the focus on the interrelations between endogenous growth and cyclical fluctuations. After reviewing models of the business cycle and endogenous growth, the paper discusses literature combining elements of both of them.
    Keywords: Business Cycles and Growth literature survey
    Date: 2007–11–28

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