nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒03‒08
five papers chosen by
Christian Zimmermann
University of Connecticut

  1. Designing fiscal rules for commodity exporters By Carlos Garcia; Jorge Restrepo; Evan Tanner
  2. International Transmission of Shocks under Financial Frictions: Some Implications for International Business Cycle Comovement By de Blas, Beatriz
  3. A Theory of Continuum Economies with Idiosyncratic Shocks and Random Matchings By Karavaev, Andrei
  4. Monopolistic Competition and the Dependent Economy Model By Romain Restout
  5. Pollution, Health and Life Expectancy: How Environmental Policy Can Promote Growth By Xavier Pautrel

  1. By: Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Jorge Restrepo (Banco Central de Chile); Evan Tanner (IMF Institute, International Monetary Fund, Washington D.C.-USA)
    Abstract: We compare welfare levels under two alternative fiscal rules: a procyclical balanced budget policy and an acyclical structural surplus (government accumulates assets). We use a dynamic, stochastic, general equilibrium model. The acylical rule benefits households that do not enjoy access to capital markets. It provides a financial cushion that they themselves cannot provide, while also boosting their mean consumption. By contrast, households that enjoy full access to capital markets suffer under this rule. Effectively, the government usurps their previous role in smoothing consumption and accumulating assets. However, a policy in between these extremes may be preferred by all.
    Keywords: welfare, small open economy, fiscal rules, rule of thumb consumers, government spending.
    JEL: E32 E61 E62 E63 F41
    Date: 2007–12
  2. By: de Blas, Beatriz (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)
    Abstract: This paper analyzes the international transmission of shocks in economies with financial frictions. In a two-country flexible price monetary model with distribution costs in the imported good I study the transmission of shocks to productivity, money supply, government spending and to entrepreneurs' net worth. Financial frictions amplify the effects of shocks both at the domestic and at the international level. In the model, international business cycle comovement, measured as cross-country output correlations, is increasing in the degree of openness and distribution costs, and as in previous literature, decreasing in the degree of financial frictions. Finally, fiscal shocks play an important role in international business cycle comovement in the presence of financial frictions. First, because the crowding out effect is stronger on private consumption and weaker on investment if there are financial frictions, and second, because fiscal shocks may reduce the cross-country correlation of output.
    Keywords: international business cycles; distribution costs; financial frictions; flexible prices
    JEL: E32 E44 F41 F42
    Date: 2008–02
  3. By: Karavaev, Andrei
    Abstract: Many economic models use a continuum of negligible agents to avoid considering one person's effect on aggregate characteristics of the economy. Along with a continuum of agents, these models often incorporate a sequence of independent shocks and random matchings. Despite frequent use of such models, there are still unsolved questions about their mathematical justification. In this paper we construct a discrete time framework, in which major desirable properties of idiosyncratic shocks and random matchings hold. In this framework the agent space constitutes a probability space, and the probability distribution for each agent is replaced by the population distribution. Unlike previous authors, we question the assumption of known identity - the location on the agent space. We assume that the agents only know their previous history - what had happened to them before, - but not their identity. The construction justifies the use of numerous dynamic models of idiosyncratic shocks and random matchings.
    Keywords: random matching; idiosyncratic shocks; the Law of Large Numbers; aggregate uncertainty; mixing
    JEL: C78 D83 E00
    Date: 2008–02–25
  4. By: Romain Restout (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: This paper explores the consequences of introducing a monopolistic competition in an intertemporal two-sector small open economy model which produces traded and non traded goods. It is assumed that the non traded sector is the locus of the imperfectly competition. Our analysis shows that markup depends on the composition of aggregate non traded demand and is therefore endogenously determined in the model. Calibrating the model with OECD parameters, the effects of fiscal and technological shocks are simulated. Our findings are as follows. First, the model is consistent with the observed saving-investment correlations found in the data. Second, unlike the perfectly framework and in accordance with empirical studies, fiscal shocks cause real appreciation of the relative price of non traded goods, which in turn enlarges the responses of current account and investment. Third, the model is consistent with the empirical report that technological shocks result in current account deficits and investment rises. Fourth, the strength of the relative price appreciation following sector productivity differentials, i.e. the Balassa-Samuelson effect, is affected by the monopolistic competition hypothesis. Assume perfect competition when it is not, biases upward estimates of the Balassa-Samuelson effect.
    Keywords: fiscal policy ; monopolistic competition ; productivity
    Date: 2008
  5. By: Xavier Pautrel (Université de Nantes)
    Abstract: This article investigates the influence of environmental policy on growth assuming that the channel of transmission relies on the link between pollution, health and the survival probability, in an overlapping generations model à la Blanchard (1985) where growth is driven by a mechanism à la Romer (1986). We demonstrate that environmental policy has an ambiguous effect on growth in the steady-state when the detrimental impact of pollution on health and lifetime is taken into account: for low levels of taxation, environmental policy promotes growth while it is harmful to growth for high levels. Furthermore, we show that the environmental policy is more likely to promote growth (i.e. it stimulates growth for a wider range of environmental taxes) when public expenditures in health and/or the impact of pollution on health are important. Finally, using numerical simulations, we find that for the value of parameters chosen the environmental policy will be more likely to harm growth when agents smooth consumption over time.
    Keywords: Growth, Environment, Overlapping generations
    Date: 2007–10

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