nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2007‒12‒19
eight papers chosen by
Christian Zimmermann
University of Connecticut

  1. A Note on Business Cycle Accounting By Gregor Baeurle; Daniel Burren
  2. Consumption-Leisure Trade-offs and Persistency in Business Cycles. By Ilaski Barañano; Paz Moral
  3. Insurance and Opportunities: A Welfare Analysis of Labor Market Risk By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  4. The Convergence of a Transition Economy: The Case of the Czech Republic By Jan Bruha; Jiri Podpiera; Stanislav Polak
  5. Pension Reform, Retirement and Life-Cycle Unemployment By Christian Jaag; Christian Keuschnigg; Mirela Keuschnigg
  6. Do Central Banks React to House Prices? By Finocchiaro, Daria; Queijo von Heideken, Virginia
  7. Biased Technological Change, Human Capital and Factor Shares. By Hernando Zuleta
  8. Dynamic Mirrlees Taxation and Political Economy By Daron Acemoglu; Michael Golosov; Aleh Tsyvinski

  1. By: Gregor Baeurle; Daniel Burren
    Abstract: Chari, Kehoe and McGrattan (2007) (CKM) show that a large class of dynamic stochastic general equilibrium (DSGE) models with various frictions and shocks is observationally equivalent to a benchmark real business cycle (RBC) model with correlated “wedges” in the RBC model's first-order conditions. The wedges in the static first-order conditions of the RBC model can be readily computed by evaluating the first-order conditions at the data and then solving for the wedges. In contrast, identification of the “investment wedge” in the RBC model's dynamic Euler equation requires the researcher to make assumptions about the expectation formation by agents in the RBC model. In particular, CKM assume that expectations are formed as if, from the perspective of the model's agents, wedges followed a vector autoregressive process of order one (VAR(1)). We show that wedges generally do not have a VAR(1) representation, implying that CKM's procedure is based on model-inconsistent expectations. We also provide an alternative, model-consistent approach to modeling expectation formation. On the former issue, we present a necessary and sufficient ``rank condition'' under which a detailed economy can be mapped into a benchmark model where wedges follow a VAR(1) process. On the latter issue, we suggest that the information set underlying the expectation formation should not only contain current wedges, but also all predetermined variables.
    Keywords: Business Cycle Accounting; Model Consistent Expectations
    JEL: C50 E10
    Date: 2007–10
  2. By: Ilaski Barañano (Dpt. Fundamentos Análisis Económico I, UPV/EHU); Paz Moral (Dpt. Economía Aplicada III (Econometría y Estadística), UPV/EHU)
    Abstract: This paper studies whether nonseparabilities between consumption and leisure may help to explain the observed persistence in GNP growth. We consider an extended version of Lucas' (1988) human capital investment model that includes labor adjustment costs and compare its performance under different utility specifications with different degrees of complementarity and substitutability between consumption and leisure. We find that when consumption and leisure are complements the model succeeds in matching not only the autocorrelation of output growth but also the important trend-reverting component found in US data. These results hold even if low adjustment costs of labor are considered. Hence, we conclude that an arguably simple margin not studied previously can provide useful insights into observed business cycle patterns.
    Keywords: Real Business Cycle Models; Endogenous Growth; Propagation Mechanism; Persistence.
    JEL: E32 O41 C52
    Date: 2007–12–12
  3. By: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
    Abstract: Using a model with constant relative risk-aversion preferences, endogenous labor supply and partial insurance against idiosyncratic wage risk, we provide an analytical characterization of three welfare effects: (a) the welfare effect of a rise in wage dispersion, (b) the welfare gain from completing markets, and (c) the welfare effect from eliminating risk. Our analysis reveals an important trade-off for these welfare calculations. On the one hand, higher wage uncertainty increases the cost associated with missing insurance markets. On the other hand, greater wage dispersion presents opportunities to raise aggregate productivity by concentrating market work among more productive workers. Our welfare effects can be expressed in terms of the underlying parameters defining preferences and wage risk, or alternatively in terms of changes in observable second moments of the joint distribution over individual wages, consumption and hours.
    JEL: E21 J22 J31
    Date: 2007–11
  4. By: Jan Bruha; Jiri Podpiera; Stanislav Polak
    Abstract: In this paper we develop a two-country dynamic general equilibrium model by means of which we seek to explain the long-run paths of a converging emerging market economy. The model’s novel feature is the inclusion of quality investment to the standard framework of applied general equilibrium two-country models. This extension proves crucial ingredient for explanation of the trend in real exchange rate. Using a case study calibration of productivity and deep parameters for the Czech economy we demonstrate the ability of the model to consistently explain dynamics in key macroeconomic variables that are essential inputs for commonly used ‘gap models’ in monetary policy practice.
    Keywords: Convergence, monetary policy, two-country modeling.
    JEL: F12 F41
    Date: 2007–09
  5. By: Christian Jaag; Christian Keuschnigg; Mirela Keuschnigg
    Abstract: The labor market effects of pension reform stem from retirement behavior and from job search and hours worked of prime age workers. This paper investigates the impact of four often proposed policy measures for sustainable pensions: strengthening the tax benefit link, moving from wage to price indexation of benefits, lengthening calculation periods, and introducing more actuarial fairness in pension assessment. We provide some analytical results and use a computational model to demonstrate the economic and welfare impact of recent pension reform in Austria.
    Keywords: Pension Reform, Retirement, Job Search, Life-cycle Unemployment
    JEL: D58 D91 H55 J26 J64
    Date: 2007–11
  6. By: Finocchiaro, Daria (Research Department, Central Bank of Sweden); Queijo von Heideken, Virginia (Research Department, Central Bank of Sweden)
    Abstract: The substantial fluctuations in house prices recently experienced by many industrialized economies have stimulated a vivid debate on the possible implications for monetary policy. In this paper, we ask whether the U.S. Fed, the Bank of Japan and the Bank of England have reacted to house prices. We study the responses of these central banks by estimating a structural model for each country where credit constrained agents borrow against real estate. The main result is that house price movements did play a separate role in the U.K. and Japanese central bank reaction functions, while they did not in the U.S.
    Keywords: House prices; monetary policy; DSGE models; Bayesian estimation
    JEL: E31 E44 E52 E58
    Date: 2007–11–01
  7. By: Hernando Zuleta
    Abstract: We propose a one-good model where technological change is factor saving and costly. We consider a production function with two reproducible factors: physical capital and human capital, and one not reproducible factor. The main predictions of the model are the following: (a) The elasticity of output with respect to the reproducible factors depends on the factor abundance of the economies. (b) The income share of reproducible factors increases with the stage of development. (c) Depending on the initial conditions, in some economies the production function converges to AK, while in other economies long-run growth is zero. (d) The share of human factors (raw labor and human capital) converges to a positive number lower than one. Along the transition it may decrease, increase or remain constant.
    Date: 2007–04–25
  8. By: Daron Acemoglu; Michael Golosov; Aleh Tsyvinski
    Date: 2007–12–12

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