nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒04‒04
five papers chosen by
Christian Zimmermann
University of Connecticut

  1. Alteration in Skills and Career-Enhancing in a Frictional Labor Market By Yosuke Oda
  2. Demographic Change, Relative Factor Prices, International Capital Flows, and their Differential Effects on the Welfare of Generations By Ludwig, Alexander; Krüger, Dirk; Börsch-Supan, Axel
  3. Inflation and Unemployment in the Long Run By Aleksander Berentsen; Guido Menzio; Randall Wright
  4. Comparing the DSGE model with the factor model: an out-of-sample forecasting experiment By Wang, Mu-Chun
  5. The dynamic general equilibrium in the Italian Paretian School By Mario Pomini; Gianfranco Tusset

  1. By: Yosuke Oda (Graduate school of Economics, Osaka university)
    Abstract: This article constructs a job-search model in which workerfs ability varies over time; a highability unemployed might lose her skills due to prolonged unemployment whereas a low-ability employed might acquire her skills due to (an implicit) on-the-job training. We numerically show that both pecuniary reward for short-term unemployed and reduction in unemployment benefits leads to lower unemployment rate, however, the former policy does stimulate careerenhancing of long-term unemployed whereas the latter does not. In addition, numerical analysis suggests that mixture of the two policy can lead to higher aggregate welfare than under a sole policy.
    Keywords: job-search model; cyclical change in skills; career-enhancing separation
    JEL: J64 J68
    Date: 2008–03
  2. By: Ludwig, Alexander (Mannheim Research Institute for the Economics of Aging (MEA) and Sonderforschungsbereich 504); Krüger, Dirk (University of Pennsylvania); Börsch-Supan, Axel (Sonderforschungsbereich 504)
    Abstract: Demographic change has differential impacts on the welfare of current and future generations. In a simple closed economy, aging -- a relative scarcity of young workers -- increases wages, increasing the welfare of the young. At the same time, population aging will reduce rates of return to capital, thereby reducing the welfare of asset holders who are usually older than the population average. In a global world with pension systems, however, these effects are less straightforward, since international capital flows dampen the factor price changes. Moreover, pay-as-you-go pension systems financed by payroll taxes create a wedge between net and gross wages, and their intergenerational redistribution has important additional effects on the welfare of generations. To quantify these effects, we develop a large-scale multi-country overlapping generations model with uninsurable labor productivity and mortality risk. Due to the predicted relative abundance of the factor capital, the rate of return falls between 2005 and 2050 by roughly 90 basis points. Our simulations indicate that capital flows from rapidly ageing regions to the rest of the world will initially be substantial, but that trends are reversed when households de-cumulate savings. In terms of welfare, our model suggests that young individuals with little assets and currently low labor productivity indeed gain from higher wages associated with population aging. Older, asset-rich households tend to loose because of the predicted decline in real returns to capital.
    Date: 2007–06–12
  3. By: Aleksander Berentsen (Department of Economics, University of Basel); Guido Menzio (Department of Economics, University of Pennsylvania); Randall Wright (Department of Economics, University of Pennsylvania)
    Abstract: We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first discuss data, documenting a strong positive relation between the variables at low frequencies. We then develop a framework where both money and unemployment are modeled using explicit micro-foundations, integrating and extending recent work in macro and monetary economics, and providing a unified theory to analyze labor and goods markets. We calibrate the model, to ask how monetary factors account quantitatively for low-frequency labor market behavior. The answer depends on two key parameters: the elasticity of money demand, which translates monetary policy to real balances and profits; and the value of leisure, which affects the transmission from profits to entry and employment. For conservative parameterizations, money accounts for some but not that much of trend unemployment — by one measure, about 1/5 of the increase during the stagflation episode of the 70s can be explained by monetary policy alone. For less conservative but still reasonable parameters, money accounts for almost all low-frequency movement in unemployment over the last half century.
    Keywords: inflation, unemployment, search
    JEL: E24 E52
    Date: 2008–03–18
  4. By: Wang, Mu-Chun
    Abstract: In this paper, we put DSGE forecasts in competition with factor forecasts. We focus on these two models since they represent nicely the two opposing forecasting philosophies. The DSGE model on the one hand has a strong theoretical economic background; the factor model on the other hand is mainly data-driven. We show that by incooperating large information set using factor analysis can indeed improve the short horizon predictive ability, as claimed by manyresearchers. The micro founded DSGE model can provide reasonable forecasts for inflation, especially with growing forecast horizons. To a certain extent, our results are consistent with the prevailling view that simple time series models should be used in short-horizon forecasting and structural models should be used in long-horizon forecasting. Our paper compareds both state-of-the art data-driven and theory-based modelling in a rigorous manner.
    Keywords: DSGE models, factor models, forecasting, forecastevaluation
    JEL: C2 C3 C53 E37
    Date: 2008
  5. By: Mario Pomini (University of Padua); Gianfranco Tusset (University of Padua)
    Abstract: The paper examines the theoretical contributions of two eminent representatives of the Italian Paretian School, namely Luigi Amoroso and Giulio La Volpe. Both contributed to the most ambitious project undertaken by the Paretian School, that is, dynamization of the general economic equilibrium. This research programme was grounded on two pillars. The first concerned the use of then sophisticated mathematical instruments, such as functional, differential equations, and the calculus of variations. The second pillar involved maintenance of a strict analogy with physics and mechanics. But whilst Amoroso mainly used a theory based on the past, La Volpe founded his proposal on the future.
    Keywords: general economic equilibrium, economic dynamics, Pareto
    JEL: B31 D50
    Date: 2008

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