nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒04‒21
thirteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Finite Horizon, Externalities, and Growth By Wendner, Ronald
  2. Second Best Analysis in a General Equilibrium Climate Change Model By GRIMAUD André; LAFFORGUE Gilles
  3. Intergenerational transfers and the stability of public debt with short-lived governments By Jean-Pierre Laffargue
  4. Central Bank Design with Heterogeneous Agents By Aleksander Berentsen; Carlo Strub
  5. A Model of Housing Boom and Bust in a Small Open Economy By Hajime Tomura
  6. A New-Keynesian DSGE Model for Forecasting the South African Economy By Guangling (Dave) Liu; Rangan Gupta; Eric Scaling
  7. Monopolistic Competition and the Dependent Economy Model By Romain Restout
  8. Labour market imperfections, "divine coincidence" and the volatility of employment and inflation By Mirko Abbritti; Andrea Boitani; Mirella Damiani
  9. La nouvelle modélisation macroéconomique appliquée à l’analyse de la conjoncture et à l’évaluation des politiques : les modèles dynamiques stochastiques d’équilibre général (DSGE) By Anne Epaulard; Jean-Pierre Laffargue; Pierre Magrange
  10. On The dynamic of search, matching and productivity in New Zealand and Australia By Razzak, Weshah
  11. Learning by Doing vs. Learning from Others in a Principal-Agent Model By Jasmina Arifovic; Alexander Karaivanov
  12. An Empirical Analysis of Intertemporal Asset Pricing Models with Transaction Costs and Habit Persistence By Wessel Marquering; Marno Verbeek
  13. Trevor Swan And The Neoclassical Growth Model By Robert W. Dimand; Barbara J. Spencer

  1. By: Wendner, Ronald
    Abstract: This paper investigates the impact of externalities on economic growth in an AK model. In contrast to the existing literature, the paper considers finitely-lived agents along the continuous time, overlapping generations literature. A series of new results, not holding for infinitely-lived agent economies, emerge. Consumption externalities generally introduce a distortion (inefficiency), even when labor supply is exogenous and there is no concurrent production externality. A negative consumption externality implies overconsumption, and growth is lower than optimal. Transition paths are considered. The model employed encompasses the infinitely-lived agent economy as a special case, thus helps understanding the differences in results between finite-horizon overlapping-generations and infinitely-lived agents economies.
    Keywords: AK growth; externality; finite lifetime; overlapping generations; optimum
    JEL: D91 E21 O40
    Date: 2008–01–01
  2. By: GRIMAUD André; LAFFORGUE Gilles
    Date: 2008–04
  3. By: Jean-Pierre Laffargue (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: Time consistent policies and reforms of intergenerational transfers are analyzed in an<br />overlapping generation model. Governments have preferences, which give much weight to the living<br />generations and they cannot commit themselves to future taxes and transfers, which will be decided by<br />future governments with different objectives. <br /><br />The economy follows one of two equilibrium paths with<br />perfect foresight. On one path, governments finance the costs of their transfers to the living by increasing public debt recklessly. Consumers pay more and more taxes to finance the cost of this debt, and the successive generations will enter a process of immiserisation. On the other path, in spite of<br />their preference bias, governments borrow less and put the economy on a path of egalitarian consumption flows for the successive generations, with a constant ratio of public debt to national income. The mechanisms, which put an economy on one or the other equilibrium paths, are unconnected to the fundamentals of the model.
    Keywords: Intergenerational transfers, Markov perfect equilibrium, overlapping generation model,<br />time consistent policies
    Date: 2008
  4. By: Aleksander Berentsen; Carlo Strub
    Abstract: We study alternative institutional arrangements for the determination of monetary policy in a general equilibrium model with heterogeneous agents, where monetary policy has redistributive effects. Inflation is determined by a policy board using either simple-majority voting, supermajority voting, or bargaining. We compare the equilibrium inflation rates to the first-best allocation.
    Keywords: Policy board, monetary policy, search
    JEL: E4 E5 D7
    Date: 2008–04
  5. By: Hajime Tomura
    Abstract: This paper considers a dynamic stochastic general equilibrium model for a small open economy and finds that an improvement in the terms of trade causes a housing boom-bust cycle if the duration of the improvement is uncertain. It is shown that as the economy has better access to the international financial market, the extent of the housing boom and bust gets larger. Also, an increase in the loan-to-value ratio in the domestic mortgage market tends to enhance the extent of the housing boom and bust when the economy has good access to the international financial market.
    Keywords: Business fluctuations and cycles; Credit and credit aggregates
    JEL: E44 F41
    Date: 2008
  6. By: Guangling (Dave) Liu (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Eric Scaling (Department of Economics, University of Pretoria)
    Abstract: This paper develops a New-Keynesian Dynamic Stochastic General Equilibrium (NKDSGE) Model for forecasting the growth rate of output, inflation, and the nominal short-term interest rate (91-days Treasury Bills rate) for the South African economy. The model is estimated via maximum likelihood technique for quarterly data over the period of 1970:1-2000:4. Based on a recursive estimation using the Kalman filter algorithm, the out-of-sample forecasts from the NKDSGE model are then compared with the forecasts generated from the Classical and Bayesian variants of the Vector Autoregression (VAR) models for the period 2001:1-2006:4. The results indicate that in terms of out-of-sample forecasting the NKDSGE model outperforms both the Classical and the Bayesian VARs for inflation, but not for output growth and the nominal short-term interest rate. However, the differences in the RMSEs are not significant across the models.
    Keywords: New-Keynesian DSGE Model; VAR and BVAR Model; Forecast Accuracy
    JEL: E17 E27 E32 E37 E47
    Date: 2008–04
  7. By: Romain Restout
    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: Monopolistic Competition, Fiscal Policy, Productivity
    JEL: E20 E62 F31 F41
    Date: 2008
  8. By: Mirko Abbritti (Graduate Institute of International Studies, Geneva); Andrea Boitani (DISCE, Università Cattolica, Milan); Mirella Damiani (Università di Perugia)
    Abstract: The dynamic general equilibrium model with hiring costs presented in this paper delivers involuntary unemployment in the steady state as well as involuntary fluctuations in unemployment. The existence of hiring friction introduces externalities that, in turn, entail the breakdown of the "divine coincidence" without assuming real wage rigidity. Our model with labour market imperfections outperforms the standard NK model as for the persistence of responses to monetary shocks. The model also allows for an analysis of the volatility of economies, differing in their "degrees of labour market rigidity". It turns out that "rigid" economies exhibit less unemployment volatility and more inflation volatility than "flexible" economies.
    Keywords: Hiring Costs, Wage Bargaining, Output Gap, New Keynesian Phillips Curve
    JEL: E24 E31 E32 E52 J64
    Date: 2008–04
  9. By: Anne Epaulard (DGTPE - Ministère de l'Economie); Jean-Pierre Laffargue (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Pierre Magrange (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales - Ecole Nationale des Ponts et Chaussées - Ecole Normale Supérieure de Paris)
    Abstract: Cet article introduit un numéro spécial présentant la totalité des aspects de la nouvelle macroéconomie dynamique. Il est divisé en trois parties : la spécification des modèles DSGE, les méthodes de simulation, d'estimation et de test des modèles DSGE, les applications des modèles DSGE.
    Keywords: modèles DSGE, économétrie bayesienne
    Date: 2008
  10. By: Razzak, Weshah
    Abstract: As far as we know there has been no, or very little, empirical examination of search models and unemployment – vacancy relationship in New Zealand. We empirically examine dynamic matching functions in the New Zealand labor market over the period 1986-2006. Further, it is well documented that although New Zealand and Australia embarked on similar wide economic reforms almost 25 years ago, the level of New Zealand’s labor productivity is still lower than that of Australia (Razzak, 2007) and lower than the US productivity level (Prescott, 2002). It is has been argued that among the main explanatory variable is the low level of capital intensity – capital per hour worked - Razzak (2007) and Hall and Scobie (2005). However, there has been no formal explanation for the low level of capital intensity. This paper explains why capital investments are relatively lower in New Zealand. We do this by examining the dynamics of the labor markets in New Zealand and Australia.
    Keywords: Matching Function; Beveridge curve; Labor Productivity
    JEL: C13 J64 C22
    Date: 2008
  11. By: Jasmina Arifovic (Simon Fraser University); Alexander Karaivanov (Simon Fraser University)
    Abstract: We introduce learning in a principal-agent model of stochastic output sharing under moral hazard. Without knowing the agents' preferences and technology the principal tries to learn the optimal agency contract. We implement two learning paradigms - social (learning from others) and individual (learning by doing). We use a social evolutionary learning algorithm (SEL) to represent social learning. Within the individual learning paradigm, we investigate the performance of reinforcement learning (RL), experience-weighted attraction learning (EWA), and individual evolutionary learning (IEL). Overall, our results show that learning in the principal-agent environment is very difficult. This is due to three main reasons: (1) the stochastic environment, (2) a discontinuity in the payoff space in a neighborhood of the optimal contract due to the participation constraint and (3) incorrect evaluation of foregone payoffs in the sequential game principal-agent setting. The first two factors apply to all learning algorithms we study while the third is the main contributor for the failure of the EWA and IEL models. Social learning (SEL), especially combined with selective replication, is much more successful in achieving convergence to the optimal contract than the canonical versions of individual learning from the literature. A modified version of the IEL algorithm using realized payoff evaluation performs better than the other individual learning models; however, it still falls short of the social learning's ability to converge to the optimal contract.
    Keywords: learning, principal-agent model, moral hazard
    JEL: D83 D86 C63
    Date: 2007–11
  12. By: Wessel Marquering; Marno Verbeek
    Abstract: In intertemporal asset pricing models, transaction costs are usually neglected. In this paper we explicitly incorporate transaction costs in these models and analyze to what extent this extension is helpful in explaining the cross-section of expected returns. An empirical analysis using CRSP data on size-based portfolios examines the role of the transaction costs and shows that incorporating such costs in the consumption-based model with power utility does not yield satisfactory results. However, the introduction of habit persistence substantially improves the model. We find rather strong evidence of habit persistence in monthly consumption data. The plots of the models' pricing errors indicate that the asset pricing model with transaction costs and habit persistence does explain the cross-sectional variation in the portfolio returns quite accurately.
    Date: 2008–03
  13. By: Robert W. Dimand; Barbara J. Spencer
    Abstract: Trevor Swan independently developed the neoclassical growth model, publishing Swan (1956) ten months later than Solow (1956), but analyzing technical progress before Solow (1957). These independent contributions are sometimes recognized by reference to the "Solow-Swan growth model", but more commonly reference is made only to the "Solow growth model". This paper examines the history of Swan's development of the growth model, the similarities and differences between the approaches of Swan and Solow and the reasons why Swan's contribution has been overshadowed. We draw on unpublished work to show that in 1950, Swan had set out a number of the basic ideas of his growth model in a verbal format. In 1956, Swan published only a simplified version of his model based on a Cobb-Douglas production function. Swan's original and more general model (circulated in July 1956), was published only posthumously in 2002. This reluctance to publish was consistent with his perhaps counterproductive modesty and perfectionism. His well known paper, "Longer run problems of the Balance of Payments" was circulated in 1955, eight years before publication in 1963. His pioneering work in 1945, developing the first macroeconomic model of the Australian economy, was published posthumously in 1989.
    JEL: B2 B3 B4 O41
    Date: 2008–04

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