nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒01‒19
eleven papers chosen by
Christian Zimmermann
University of Connecticut

  1. The Business Cycle Implications of Reciprocity in Labor Relations By Jean-Pierre DANTHINE; André KURMANN
  2. A Rational Expectations Model for Simulation and Policy Evaluation of the Spanish Economy By J.E. Boscá; A. Díaz; R. Doménech; J. Ferri; E. Pérez; L. Puch
  3. A further note on a new class of solutions to dynamic programming problems arising in economic growth By Juergen Antony; Alfred Maussner
  4. Incomplete markets, liquidation risk and the term structure of interest rates By Edouard Challe; François Le Grand; Xavier Ragot
  5. Real Exchange Rate Overshooting in Real Business Cycle Model - An Empirical Evidence From India By Minford, Patrick; Pal, Soubarna
  6. Public spending shocks in a liquidity-constrained economy By Edouard Challe; Xavier Ragot
  7. Technology Capital and the U.S. Current Account By Ellen R McGrattan; Edward C Prescott
  8. Why do home owners work longer hours? By Renata Bottazzi; Hamish Low; Matthew Wakefield
  9. Optimal investment policy with fixed adjustment costs and complete irreversibility By Nicolas Roys
  10. Comparing Consumption: A Curse or a Blessing? By Strulik, Holger
  11. Utility-Based Utility By David Cass

  1. By: Jean-Pierre DANTHINE; André KURMANN
    Abstract: We develop a reciprocity-based model of wage determination and incorporate it into a modern dynamic general equilibrium framework. We estimate the model and find that, among potential determinants of wage policy, rent-sharing (between workers and firms) and a measure of wage entitlement are critical to fit the dynamic responses of hours, wages and inflation to various exogenous shocks. Aggregate employment conditions (measuring workers' outside option), on the other hand, are found to play only a negligible role in wage setting. These results are broadly consistent with micro-studies on reciprocity in labor relations but contrast with traditional efficiency wage models which emphasize aggregate labor market variables as the main determinant of wage setting. Overall, the empirical fit of the estimated model is at least as good as the fit of models postulating nominal wage contracts. In particular, the reciprocity model is more successful in generating the sharp and significant fall of inflation and nominal wage growth in response to a neutral technology shock.
    Keywords: efficiency wages; reciprocity; estimated DSGE models
    JEL: E24 E31 E32 E52 J50
    Date: 2007–11
  2. By: J.E. Boscá (University of Valencia, Spain); A. Díaz (Ministry of Economics and Finance, Spain); R. Doménech (Economic Bureau of the Prime Minister, Spain. University of Valencia, Spain); J. Ferri (University of Valencia, Spain); E. Pérez (Ministry of Economics and Finance, Spain); L. Puch (FEDEA, Universidad Complutense and ICAE, Spain)
    Abstract: This paper describes a Rational Expectations Model of the Spanish economy, REMS, which is in the tradition of small open economy dynamic general equilibrium models, with a strongly microfounded system of equations. The model is built on standard elements, but incorporates some distinctive features to provide an accurate description of the Spanish economy. We contribute to the existing models of the Spanish economy by adding search and matching rigidities to a small open economy framework. Our model also incorporates habits in consumption and rule-of-thumb households. As Spain is a member of EMU, we model the interaction between a small open economy and monetary policy in a monetary union. The model is primarily constructed to serve as a simulation tool at the Spanish Ministry of Economic Affairs and Finance. As such, it provides a great deal of information regarding the transmission of policy shocks to economic outcomes. The paper describes the structure of the model in detail, as well as the estimation and calibration technique and some examples of simulations.
    Keywords: general equilibrium, rigidities, policy simulations
    JEL: E24 E32 E62
    Date: 2007–12
  3. By: Juergen Antony (University of Augsburg, Department of Economics); Alfred Maussner (University of Augsburg, Department of Economics)
    Abstract: This note extends the finding of Benhabib and Rusticchini (1994) who provide a class of SDGE models, whose solution is characterized by a constant savings rate. We show that this class of models may be interpreted as a standard representative agent SDGE model with costly adjustment of capital and provides a solution to the traditional discrete time Ramsey problem.
    Keywords: capital and labor substitution, dynamic programming, growth, numerical solutions of SDGE models
    JEL: C61 C68 E21 O4
    Date: 2008–01
  4. By: Edouard Challe; François Le Grand; Xavier Ragot
    Abstract: We construct a general equilibrium model with incomplete markets and borrowing constraints, in order to study the term structure of real interest rates. Agents are subject to both aggregate and idiosyncratic income shocks, which latter may force them into early portfolio liquidation whilst in recession. We derive a closed-form equilibrium with limited agents heterogeneity (despite market incompleteness), which allows us to derive analytical expressions for bond prices and returns at any maturity. The desirability of bonds as liquidity makes the aggregate bond demand downward-sloping. One consequence of this is that a larger bond supply raises both the level and the slope of the yield curve.
    Date: 2007
  5. By: Minford, Patrick (Cardiff Business School); Pal, Soubarna
    Abstract: The objective of this paper is to establish the ability of a Real Business Cycle (RBC) model to account for the behaviour of the real exchange rate, using Indian data (1966-1997). We calibrate the dynamic general equilibrium open economy model (Minford, Sofat 2004) based on optimising decisions of rational agents, using annual data for India. The first order conditions from the households' and firms' optimisation problem are used to derive the behavioural equations of the model. The interaction with the rest of the world comes in the form of uncovered real interest rate parity and current account both of which are explicitly micro-founded. The paper discusses the simulation results of 1 percent per annum productivity growth shock, which shows that the real exchange rate appreciates and then goes back to a new equilibrium (lower than the previous one), producing a business cycle. Thus the behaviour of the real exchange rate may be explicable within the RBC context. Finally we test our model and evaluate statistically whether our calibrated model is seriously consistent with the real exchange rate data, using bootstrapping procedure. We bootstrap our model to generate pseudo real exchange rate series and find that the ARIMA parameters estimated for the actual real exchange rate data lie within the 95% confidence limits constructed by bootstrapping. We find the same result for the nominal rigidity version of the RBC model. So we conclude that the behaviour of the Indian real exchange rate (US $ / Indian Rupees) can be explained by RBC.
    Date: 2008–01
  6. By: Edouard Challe; Xavier Ragot
    Abstract: This paper analyses the effect of transitory increases in government spending when public debt is used as liquidity by the private sector. Aggregate shocks are introduced into an incomplete-market economy where heterogenous, infinitely-lived households face occasionally binding borrowing constraints and store wealth to smooth out idiosyncratic income fluctuations. Debt-financed increases in public spending facilitate self-insurance by bond holders and may crowd in private consumption. The implied higher stock of liquidity also loosens the borrowing constraints faced by firms, thereby raising labour demand and possibly the real wage. Whether private consumption and wages actually rise or fall ultimately depends on the relative strengths of the liquidity and wealth effect that are produced by the shock.
    Date: 2007
  7. By: Ellen R McGrattan; Edward C Prescott
    Date: 2008–01–09
  8. By: Renata Bottazzi (Institute for Fiscal Studies); Hamish Low (Institute for Fiscal Studies and Trinity College, Cambridge); Matthew Wakefield (Institute for Fiscal Studies)
    Abstract: <p>This paper uses a structural model to address the question of why home-owners with large mortgage debt work longer hours than those without such debt. We consider whether this is due to lower net wealth or to capital market imperfections, including mortgage constraints that depend on current earnings and, therefore, labour supply choices. We show that the need to meet current mortgage commitments can generate the observed correlation, and this impact of current commitments arises from the institutional borrowing constraints. We also show that labour supply as a function of household debt is highly nonlinear: those with greater debt are more likely to face binding borrowing constraints and their labour supply is more variable.</p>
    Date: 2007–07
  9. By: Nicolas Roys (Institute for Fiscal Studies)
    Abstract: <p><p>We develop and solve analytically an investment model with fixed adjust-ment costs and complete irreversibility that reproduces observed investment dynamics at the micro-level. We impose a minimal set of restrictions on technology and uncertainty. Most of the results duplicate or generalize earlier findings that have been established either by simulations or under contrefactual assumptions.</p></p>
    JEL: C61 D21 E2
    Date: 2007–11
  10. By: Strulik, Holger
    Abstract: Does it make us unhappier when we compare our current consumption with that of the Joneses or our own past achievements? This paper tries an answer without recurring on interpersonal utility comparisons. It calibrates an economy under three different assumptions, non-comparing utility, and inward-looking and outward-looking habit formation. Using consumption equivalents it then calculates how much individual welfare is affected in each economy by unexpected losses and gains of wealth.
    Keywords: habit formation, happiness, welfare, economic growth
    JEL: D60 D91 E21 O40
    Date: 2008–01
  11. By: David Cass (Department of Economics, University of Pennsylvania)
    Abstract: A major virtue of von Neumann-Morgenstern utilities, for example, in the theory of general financial equilibrium (GFE), is that they ensure intertemporal consistency: consumption-portfolio plans (for the future) are in fact executed (in the future) — assuming that there is perfect foresight about relevant endogenous variables. This note proposes an alternative to expected utility, one which also delivers consistency between plan and execution — and more. In particular, it turns out that one special case is in fact simply discounted (subjective) expected utility. Moreover, this alternative formulation affords an extremely natural setting for introducing extrinsic uncertainty. The key idea behind my approach is to divorce the concept of filtration (of the state space) from any considerations involving probability (on the state space), and then concentrate attention on nested utilities of consumption looking forward from any date-event: utility today depends only on consumption today and prospective utility of consumption tomorrow, utility tomorrow depends only on consumption tomorrow and prospective utility of consumption the day after tomorrow, and so on.
    Keywords: Utility theory, Expected utility, Intertemporal consistency, Extrinsic uncertainty, Cass-Shell Immunity Theorem
    JEL: D61 D81 D91
    Date: 2007–12–15

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