nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒02‒16
thirteen 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. The tax treatment of homeowners and landlords and the progressivity of income taxation By Matthew Chambers; Carlos Garriga; Don Schlagenhauf
  3. How Much Inflation is Necessary to Grease the Wheels? By Kim, Jinill; Ruge-Murcia, Francisco J.
  4. Business Cycle Accounting for the Chinese Economy By Gao, Xu
  5. International Trade in Durable Goods: Understanding Volatility, Cyclicality, and Elasticities By Charles Engel; Jian Wang
  6. Comparative Advantage in Cyclical Unemployment By Mark Bils; Yongsung Chang; Sun-Bin Kim
  7. Efficiency of Simultaneous Search By Philipp Kircher
  8. Explaining the Size Distribution of Cities: X-treme Economies By Berliant, Marcus; Watanabe, Hiroki
  9. Is Volatility Good for Growth? Evidence from the G7 By Elena Andreou; Alessandra Pelloni; Marianne Sensier
  10. Positive and normative effects of a minimum wage By Guillaume Rocheteau; Murat Tasci
  11. Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets By Schied, Alexander; Schoeneborn, Torsten
  12. Internal Debt Crises and Sovereign Defaults By Cristina Arellano; Narayana R. Kocherlakota
  13. Impact of a Lower Oil Subsidy on Indonesian Macroeconomic Performance, Agricultural Sector and Poverty Incidences: a Recursive Dynamic Computable General Equilibrium Analysis By Rina Oktaviani; Dedi Budiman Hakim; Hermanto Siregar; Sahara Sahara

  1. By: Jean-Pierre Danthine; André Kurmann
    Abstract: We develop a reciprocity-based model of wage determination and incorporate it into a moder 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
  2. By: Matthew Chambers; Carlos Garriga; Don Schlagenhauf
    Abstract: This paper analyzes the connection between the asymmetric tax treatment of homeowners and landlords and the progressivity of income taxation using a quantitative overlapping generations general equilibrium model with housing and rental markets. Our model emphasizes the determinants of tenure choice (owning versus renting) and the household decision to supply housing services to the rental market. This formulation breaks the link between the rental price and the equilibrium interest rate. Hence, the aggregate supply of rental property responds differently to the direction of rental price changes, marginal tax rate changes, and maintenance cost changes. We show that the model replicates the key factors and the distributional patterns of ownership, house size, and landlords. The degree of progressivity in the income tax code has important implications for housing tenure and housing consumption. We find that a movement toward a less progressive income tax code can generate sizable increases in homeownership and welfare that result from the equilibrium effects and a portfolio reallocation mechanism absent in economies with single assets (e.g., Conesa and Krueger 2006). We find that the removal of existing asymmetries in the tax code has effects on housing that differ from those reported in the literature. We show that housing policy can increase the ownership rate of a particular segment of the population but generate nontrivial distributional costs. The welfare increases are no larger than those found when the progressivity of the tax code is reduced.
    Date: 2008
  3. By: Kim, Jinill; Ruge-Murcia, Francisco J.
    Abstract: This paper studies Tobin's proposition that inflation "greases" the wheels of the labor market. The analysis is carried out using a simple dynamic stochastic general equilibrium model with asymmetric wage adjustment costs. Optimal inflation is determined by a benevolent government that maximizes the households' welfare. The Simulated Method of Moments is used to estimate the nonlinear model based on its second-order approximation. Econometric results indicate that nominal wages are downwardly rigid and that the optimal level of grease inflation for the U.S. economy is about 1.2 percent per year, with a 95% confidence interval ranging from 0.2 to 1.6 percent.
    Keywords: Oimal inflation, asymmetric adjustment costs, nonlinear dynamics
    JEL: E4 E5
    Date: 2007
  4. By: Gao, Xu
    Abstract: We evaluate sources of business cycle fluctuations in China after 1978 with business cycle accounting method developed by Chari, Kehoe, and McGrattan (2007). We find that efficiency wedge, which represents institutional change and technology advance, was the main source of economic fluctuations in 1978 - 2006. The amplitude of it fluctuation declined after 1992, which resulted in moderation of business cycle fluctuations. We also find that distortions manifest themselves as taxes on investment, which represents frictions in the capital market, became another economic fluctuation source after 1992, which is different from results of business cycle accounting on US and Japan data. Our results also show that government consumption and net exports played minor roles in generating business cycles. Our results point out several promising directions for future research on China’s business cycle.
    Keywords: Business cycle fluctuations; Business cycle accounting; Chinese economy
    JEL: O47 E32 O53 E37
    Date: 2007–11
  5. By: Charles Engel; Jian Wang
    Abstract: Data for OECD countries document: 1. imports and exports are about three times as volatile as GDP; 2. imports and exports are pro-cyclical, and positively correlated with each other; 3. net exports are counter-cyclical. Standard models fail to replicate the behavior of imports and exports, though they can match net exports relatively well. Inspired by the fact that a large fraction of international trade is in durable goods, we propose a two-country two-sector model, in which durable goods are traded across countries. Our model can match the business cycle statistics on the volatility and comovement of the imports and exports relatively well. In addition, the model with trade in durables helps to understand the empirical regularity noted in the trade literature: home and foreign goods are highly substitutable in the long run, but the short run elasticity of substitution is low. We note that durable consumption also has implications for the appropriate measures of consumption and prices to assess risk-sharing opportunities, as in the empirical work on the Backus-Smith puzzle. The fact that our model can match data better in multiple dimensions suggests that trade in durable goods may be an important element in open-economy macro models.
    JEL: E32 F3 F4
    Date: 2008–02
  6. By: Mark Bils (University of Rochester); Yongsung Chang (University of Rochester); Sun-Bin Kim (Korea University)
    Abstract: We introduce worker differences in labor supply, reflecting differences in skills and assets, into a model of separations, matching, and unemployment over the business cycle. Separating from employment when unemployment duration is long is particularly costly for workers with high labor supply. This provides a rich set of testable predictions across workers: those with higher labor supply, say due to lower assets, should display more procyclical wages and less countercyclical separations. Consequently, the model predicts that the pool of unemployed will sort toward workers with lower labor supply in a downturn. Because these workers generate lower rents to employers, this discourages vacancy creation and exacerbates the cyclicality of unemployment and unemployment durations. We examine wage cyclicality and employment separations over the past twenty years for workers in the Survey of Income and Program Participation (SIPP). Wages are much more procyclical for workers who work more. This pattern is mirrored in separations; separations from employment are much less cyclical for those who work more. We do see for recessions a strong compositional shift among those unemployed toward workers who typically work less.
    Date: 2008–01
  7. By: Philipp Kircher (Department of Economics, University of Pennsylvania)
    Abstract: We analyze a labor search model in which workers choose their search intensity by deciding how often and where to apply for jobs. They observe firms’ wage postings prior to their decision. Due to coordination frictions a firm may not receive any applications; otherwise it is able to hire unless all its applicants have better offers. We show that in equilibrium the entry of firms, the search intensity and the number of filled vacancies are constrained efficient. Wage dispersion creates an (endogenous) safety net against unemployment that is essential for efficiency. As application costs vanish the equilibrium becomes unconstrained efficient.
    Keywords: simultaneous search, directed search, efficient wage dispersion, modified Hosios condition, search with stable matchings
    JEL: J64 C78 D85
    Date: 2008–01–03
  8. By: Berliant, Marcus; Watanabe, Hiroki
    Abstract: The methodology used by theories to explain the size distribution of cities takes an empirical fact and works backward to first obtain a reduced form of a model, then pushes this reduced form back to assumptions on primitives. The induced assumptions on consumer behavior, particularly about their inability to insure against the city-level productivity shocks in the model, are untenable. With either self insurance or insurance markets, and either an arbitrarily small cost of moving or the assumption that consumers do not perfectly observe the shocks to firms' technologies, the agents will never move. Even without these frictions, our analysis yields another equilibrium with insurance where consumers never move. Thus, insurance is a substitute for movement. Even aggregate shocks are insufficent to generate consumer movement, since consumers can borrow and save. We propose an alternative class of models, involving extreme risk against which consumers will not insure. Instead, they will move.
    Keywords: Zipf's Law; Gibrat's Law; Size Distribution of Cities; Extreme Value Theory
    JEL: R12
    Date: 2008–02–09
  9. By: Elena Andreou; Alessandra Pelloni; Marianne Sensier
    Abstract: We provide empirical support for a DSGE model with nominal wage stickiness where growth is driven by learning-by-doing and money shocks and their variance are allowed to impact on long-run output growth. In our theoretical model the variance of monetary shocks has a negative effect on growth, while output volatility is good for growth as a positive relationship exists. Utilising a bivariate GARCH-M model we test the empirical conditional mean and variance relationships of nominal money and production growth rates in the G7 countries. We corroborate the theoretical model predictions with evidence from Bonferroni multiple tests across the G7.
    Date: 2008
  10. By: Guillaume Rocheteau; Murat Tasci
    Abstract: We review the positive and normative effects of a minimum wage in various versions of a search-theoretic model of the labor market.
    Keywords: Minimum wage ; Labor market
    Date: 2008
  11. By: Schied, Alexander; Schoeneborn, Torsten
    Abstract: We consider the infinite-horizon optimal portfolio liquidation problem for a von Neumann-Morgenstern investor in the liquidity model of Almgren (2003). Using a stochastic control approach, we characterize the value function and the optimal strategy as classical solutions of nonlinear parabolic partial differential equations. We furthermore analyze the sensitivities of the value function and the optimal strategy with respect to the various model parameters. In particular, we find that the optimal strategy is aggressive or passive in-the-money, respectively, if and only if the utility function displays increasing or decreasing risk aversion. Surprisingly, only few further monotonicity relations exist with respect to the other parameters. We point out in particular that the speed by which the remaining asset position is sold can be decreasing in the size of the position but increasing in the liquidity price impact.
    Keywords: Liquidity; illiquid markets; optimal liquidation strategies; dynamic trading strategies; algorithmic trading; utility maximization
    JEL: G12 G33 G24 G10 G20
    Date: 2008–02–08
  12. By: Cristina Arellano; Narayana R. Kocherlakota
    Abstract: In this paper, we use data from developing countries to argue that sovereign defaults are often caused by fiscal pressures generated by large-scale domestic defaults. We argue that these systemic domestic defaults are caused by shocks best interpreted as being non-fundamental. We construct a model that is consistent with these observations. The key ingredient of the model is that it is impossible to liquidate large amounts of entrepreneurial assets. This restriction generates the possibility of a domestic coordinated default crisis, in which domestic borrowers find it optimal to default because all other borrowers are also defaulting. We conclude that avoiding sovereign defaults requires better internal institutions, not better external ones.
    JEL: F34 G33
    Date: 2008–02
  13. By: Rina Oktaviani; Dedi Budiman Hakim; Hermanto Siregar; Sahara Sahara
    Abstract: Budget deficit, exchange rate fluctuation and high fuel world price provides a pressure on budget capacity to stimulate the Indonesian economy. The government has designed several fiscal policies, including reducing the fuel subsidy. The study objective is to analyse the impact of reducing fuel subsidy on macroeconomic variables, agricultural sector, and income distribution. The modification on the basic model, which is a recursive-dynamic CGE model, is made in this study. The data used in the model is of the Indonesian I-O Table 2000, The Indonesian Social Accounting Matrix 2000, National Household Survey data and parameter from some other sources. The results show that the reduction in fuel price subsidy tends to increase prices of industrial outputs that highly depend on fuel, such as transportation and fishery sectors. In contrast, the change in fuel price does not influence the price of paddy. Wage of skilled labor, land rent, and capital rent decline steadily in response to the change in fuel price. Households will lose their income following the reduction in fuel subsidy, which then decreases the welfare of households. Incomes are not evenly distributed within the society (household groups). An increased fuel price at consumer level declines the Indonesian real GDP. The government should give the compensation of reducing the fuel subsidy directly to the poor people. The compensation can also be given directly to the poor people through the development of infrastructure, which may solve some supply side bottlenecks in the economy.
    Keywords: Fuel subsidy, income distribution, recursive dynamic CGE
    JEL: C68 D63 I32 I38 O13
    Date: 2007

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