nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒02‒23
eight papers chosen by
Christian Zimmermann
University of Connecticut

  1. Testing a DSGE model and its partner database By Lavan Mahadeva; Juan Carlos parra
  2. "Job search with ubiquity and the wage distribution" By Bruno Decreuse; André Zylberberg
  3. Optimal Income Tax Policy and Wage Subsidy By Sheikh Selim
  4. Scenario Analysis with Recursive Utility: Dynamic Consumption Plans for Charitable Endowments By Stephen Satchell; Susan Thorp
  5. Demography and Equity Premium By Wolfgang Kuhle
  6. How do nominal and real rigidities interact? A tale of the second best By Duval, Romain; Vogel, Lukas
  7. Informal Insurance and Income Inequality By Laczó, Sarolta
  8. Optimal Search with Costly Recall By Maarten C.W. Janssen; Alexei Parakhonyak

  1. By: Lavan Mahadeva; Juan Carlos parra
    Abstract: There is now an impetus to apply dynamic stochastic general equilibrium models to forecasting. But these models typically rely on purpose-built data, for example on tradable and nontradable sector outputs. How then do we know that the model will forecast well, in advance? We develop an early warning test of the database-model match and apply that to a Colombian model. Our test reveals where the combination should work (consumption) and where not (in investment). The test can be adapted to look at many likely sources of DSGE model failure.
    Date: 2008–01–29
  2. By: Bruno Decreuse (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); André Zylberberg
    Abstract: We propose a search equilibrium model in which homogenous firms post wages along with a vacancy to attract job-seekers, while homogenous unemployed workers invest in costly search. The key innovation relates to the organisation of the search market and the search behaviour of the job-seekers. The search market is segmented by wage level, and unlike the rest of the literature individuals are ubiquitous in the sense they can choose the amount of search effort spent on each (sub-)market. We show that there exists a non-degenerate equilibrium wage distribution. Remarkably, the density of this wage distribution is hump-shaped, and it can be right-skewed. Our results are illustrated by an example originating a Beta wage distribution.
    Keywords: "Search effort"; "Segmented markets"; "Monopsony"; "Wage dispersion"
    Date: 2007
  3. By: Sheikh Selim (Cardiff University, UK)
    Abstract: We show that in an imperfectly competitive economy, if the government cannot use wage subsidy, in a steady state and in the initial period the optimal labour income tax rate is zero. In an imperfectly competitive economy, since investment is primarily triggered by the motive to earn higher profits, over accumulation of capital induces suboptimal level of working hours. We argue that if the government is restricted to subsidize wage, the optimal policy should set zero tax on labour income which will encourage workers to increase working hours back to the optimal level.
    Date: 2008–01
  4. By: Stephen Satchell (University of Cambridge); Susan Thorp (School of Finance and Economics, University of Technology, Sydney)
    Abstract: We determine optimal consumption paths under a series of returns scenarios for charitable endowments with distinct tastes over investment risk and inter-temporal substitution. Charities typically prefer smooth consumption paths but are investment-risk tolerant. Using a recursive, Kreps-Porteus utility function, we model the optimal disbursement from an infinitely-lived charitable trust, then, allowing a general form for the returns density, we apply stochastic dominance relations to estimate income/substitution effects whereby a change in future returns influences the current consumption rate. The elasticity of intertemporal substitution rather than risk aversion is key: optimal consumption rises or falls as the elasticity diverges from one.
    Keywords: recursive utility; stochastic dominance; inter-temporal choice
    JEL: G00 D81 D91
    Date: 2007–12–01
  5. By: Wolfgang Kuhle (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: This article comprises a tractable two-generations-overlapping, stochastic, neoclassical production economy, where government bonds are in positive net supply. In this framework we show that the entrance of larger (smaller) cohorts into the labor market will lead to an increase (decrease) in the risky and the riskless rate and to an increase (decrease) in the expected equity premium.
    Date: 2008–02–15
  6. By: Duval, Romain; Vogel, Lukas
    Abstract: This paper analyses the importance of real wage rigidities, in particular through their interaction with price stickiness, for optimal monetary policy in a calibrated small open economy DSGE model including oil in production and consumption. Blanchard and Galí (2007a) show real rigidities to introduce a trade-off between stabilising inflation and the welfare-relevant output gap. The present paper complements their findings by showing that the welfare cost of real rigidities can be substantial compared to nominal frictions. In a typical “tale of the second best”, we also show that in the presence of real wage rigidities, price stickiness can be welfare-enhancing.
    Keywords: DSGE model; price stickiness; real wage rigidity; oil price shocks
    JEL: E30 F41 Q43
    Date: 2007–10–31
  7. By: Laczó, Sarolta
    Abstract: This paper examines the effects of income inequality in a risk sharing model with limited commitment, that is, when insurance agreements have to be self-enforcing. In this context, numerical dynamic programming is used to examine three questions. First, I consider heterogeneity in mean income, and study the welfare effects when inequality together with aggregate income increases. Second, subsistence consumption is introduced to see how it affects consumption smoothing. Finally, income is endogenized by allowing households to choose between two production technologies, to look at the importance of consumption insurance for income smoothing.
    Keywords: risk sharing, limited commitment, inequality, technology choice, developing countries
    JEL: I30 D80 O12
    Date: 2008–02
  8. By: Maarten C.W. Janssen (Erasmus University Rotterdam); Alexei Parakhonyak (Erasmus University Rotterdam)
    Abstract: This paper builds a consumer search model where the cost of going back to stores already searched is explicitly taken into account. We show that the optimal search rule under costly recall is very different from the optimal search rule under perfect recall. Under costly recall, the optimal search behaviour is nonstationary and, moreover, the reservation price is not independent of previously sampled prices. We fully characterize the optimal search rule under costly recall when a finite number of firms draws price quotes from a given distribution.
    Keywords: Search; Costly Recall
    JEL: C61 D11 D83
    Date: 2007–01–11

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