nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒04‒15
nine papers chosen by
Christian Zimmermann
University of Connecticut

  1. Entry, Exit and Investment-Specific Technical Change By Roberto M. Samaniego
  2. Financial infrastructure, technological shift, and inequality in economic development By Ryo, Horii; Kazuhiro, Yamamoto; Ryoji, Ohdoi
  3. Indivisible Labor in a Small Open Economy Model By Zuzana Janko
  4. Inflation and Unemployment in the Long Run By Aleksander Berentsen; Guido Menzio; Randall Wright
  5. The rationality of expectations formation and excess volatility. By Julio Davila
  6. Adjustment Costs in a Real Business Cycle Model By Zuzana Janko
  7. The Nature of Credit Constraints and Human Capital By Lance J. Lochner; Alexander Monge-Naranjo
  8. Job protection, industrial relations and employment By Giulio Piccirilli
  9. Current Account Dynamics and Monetary Policy By Andrea Ferrero; Mark Gertler; Lars E.O. Svensson

  1. By: Roberto M. Samaniego (Department of Economics, George Washington University)
    Abstract: Across industries, this paper finds that the rate of investment-specific technical change (ISTC) is positively related to rates of entry and exit. This finding is consistent with industry dynamics along the balanced growth path of a general equilibrium, multi-industry model of the plant lifecycle, in which technology adoption is costly and the rate of ISTC varies across industries. Results are robust to allowing for structural change induced by technological progress. The model also generates lumpy investment as a result of technology adoption by incumbents.
    Keywords: Entry, exit, turnover, investment-specific technical change, entry costs, vintage capital, embodied technical change, selection, obsolescence, structural change, lumpy investment.
    JEL: L16 O33 O41
    Date: 2008–04–02
  2. By: Ryo, Horii; Kazuhiro, Yamamoto; Ryoji, Ohdoi
    Abstract: This paper presents an overlapping generations model with technology choice and imperfect financial markets, and examines the evolution of income distribution in economic development. The model shows that improvements in financial infrastructure facilitate economic development both by raising the aggregate capital-labor ratio and by causing a technological shift to more capital-intensive technologies. While a higher capital-labor ratio under a given technology reduces inequality, a technological shift can lead to a concentration of the economic rents among a smaller number of agents. We derive the condition under which an improvement in financial infrastructure actually decreases the average utility of agents.
    Keywords: Technological Shift; Income Distribution; Rents; Enforcement; Credit Rationing
    JEL: O16 O14
    Date: 2008–03–22
  3. By: Zuzana Janko
    Date: 2008–01–11
  4. By: Aleksander Berentsen; Guido Menzio; Randall Wright
    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 microfoundations, 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.
    JEL: E24 E52
    Date: 2008–04
  5. By: Julio Davila (Centre d'Economie de la Sorbonne et Paris School of Economics)
    Abstract: I establish, in simple deterministic overlapping generations economies, that if each agent holds rationally formed expectations in the sense that any other expectations justifying his choices imply a smaller likelihood for the history he observes with limited memory, then there are rationally formed expectations equilibria exhibiting an excess volatility that no rational expectations equilibrium can match. Given that the limited records or finite memory case may arguably be the relevant one from a positive viewpoint, this result suggests that the possibility of excess volatility as an equilibrium phenomenon has been downplayed by the use of the rational expectations hypothesis.
    Keywords: Expectations, rationality, volatility.
    JEL: D51 D84 D91
    Date: 2008–02
  6. By: Zuzana Janko
    Date: 2008–01–11
  7. By: Lance J. Lochner; Alexander Monge-Naranjo
    Abstract: This paper studies the nature and impact of credit constraints in the market for human capital. We derive endogenous constraints from the design of government student loan programs and from the limited repayment incentives in private lending markets. These constraints imply cross-sectional patterns for schooling, ability, and family income that are consistent with U.S. data. This contrasts with the standard exogenous constraint model, which predicts a counterfactual negative ability -- schooling relationship for low-income youth. We show that the rising empirical importance of familial wealth and income in determining college attendance (Belley and Lochner 2007) is consistent with increasingly binding credit constraints in the face of rising tuition costs and returns to schooling. Our framework also explains the recent increase in private credit for college as a market response to the rising returns to school.
    JEL: H81 I22 I28
    Date: 2008–04
  8. By: Giulio Piccirilli (DISCE, Università Cattolica)
    Abstract: In a dynamic stochastic monopoly union model we show that firing costs have a small and ambiguous impact on the level of employment if the union precommits to future wages. Further, in comparison with the commitment equilibrium and for very general union preferences, the no-commitment equilibrium exhibits higher wages and a lower employment level. Since commitment-like equilibria are more likely in cooperative bargain environments, these results suggest that, coeteris paribus, the interaction between employment protection and the quality of industrial relations reduces unemployment. We provide evidence on OECD countries which is consistent with this predictions.
    Keywords: Firing costs, unemployment, industrial relations.
    JEL: J23 J51 J63
    Date: 2007–10
  9. By: Andrea Ferrero; Mark Gertler; Lars E.O. Svensson
    Abstract: We explore the implications of current account adjustment for monetary policy within a simple two-country DSGE model. Our framework nests Obstfeld and Rogoff's (2005) static model of exchange rate responsiveness to current account reversals. It extends this approach by endogenizing the dynamic adjustment path and by incorporating production and nominal price rigidities in order to study the role of monetary policy. We consider two different adjustment scenarios. The first is a "slow burn" where the adjustment of the current account deficit of the home country is smooth and slow. The second is a "fast burn" where, owing to a sudden shift in expectations of relative growth rates, there is a rapid reversal of the home country's current account. We examine several different monetary policy regimes under each of these scenarios. Our principal finding is that the behavior of the domestic variables (for instance, output, inflation) is quite sensitive to the monetary regime, while the behavior of the international variables (for instance, the current account and the real exchange rate) is less so. Among different policy rules, domestic inflation targeting achieves the best stabilization outcome of aggregate variables. This result is robust to the presence of imperfect pass-through on import prices, although in this case stabilization of consumer price inflation performs similarly well.
    JEL: E0 F0
    Date: 2008–04

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