New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒05‒05
five papers chosen by



  1. A quantitative perspective on optimal monetary policy cooperation between the US and the euro area. By Frank Smets; Matthieu Darracq Pariès; Stéphane Adjemian
  2. Learning, Adaptive Expectations, and Technology Shocks By Kevin X.D. Huang; Zheng Liu; Tao Zha
  3. The Toll of Subrational Trading in an Agent Based Economy By Paolo Pellizzari
  4. Promoting clean technologies: The energy market structure crucially matters. By Azomahou, Théophile; Boucekkine, Raouf; Nguyen-Van, Phu
  5. Vehicle Currency By Michael B. Devereux; Shouyong Shi

  1. By: Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Stéphane Adjemian (Université du Maine, Avenue Olivier Messiaen, 72085 Le Mans Cedex 9, France.)
    Abstract: The objective of this paper is to examine the main features of optimal monetary policy cooperation within a micro-founded macroeconometric framework. First, using Bayesian techniques, we estimate a two-country dynamic stochastic general equilibrium (DSGE) model for the United States (US) and the euro area (EA). The main features of the new open economy macroeconomics (NOEM) are embodied in our framework: in particular, imperfect exchange rate pass-through and incomplete financial markets internationally. Each country model incorporates the wide range of nominal and real frictions found in the closed-economy literature: staggered price and wage settings, variable capital utilization and fixed costs in production. Then, using the estimated parameters and disturbances, we study the properties of the optimal monetary policy cooperation through welfare analysis, impulse responses and variance decompositions. JEL Classification: E4, E5, F4.
    Keywords: DSGE models, Optimal monetary policy, New open economy macroeconomics, Bayesian estimation.
    Date: 2008–03
    URL: http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080884&r=dge
  2. By: Kevin X.D. Huang (Department of Economics, Vanderbilt University); Zheng Liu (Department of Economics, Emory University); Tao Zha (Federal Reserve Bank of Atlanta)
    Abstract: This study explores theoretical and macroeconomic implications of the self-confirming equilibrium in a standard growth model. When rational expectations are replaced by adaptive expectations, we prove that the self-confirming equilibrium is the same as the steady state rational expectations equilibrium, but that dynamics around the steady state are substantially different between the two equilibria. We show that, in contrast to \citet{nWilliams03}, the differences are driven mainly by the lack of the wealth effect and the strengthening of the intertemporal substitution effect, not by escapes. As a result, adaptive expectations substantially alter the amplification and propagation mechanisms and allow technology shocks to exert much more impact on macroeconomic variables than do rational expectations.
    Keywords: Self confirming equilibrium, amplification, labor market dynamics, wealth and substitution effects, hump-shaped responses <br><br>
    JEL: E32 E37
    Date: 2008–08
    URL: http://d.repec.org/n?u=RePEc:van:wpaper:0807&r=dge
  3. By: Paolo Pellizzari
    Abstract: In an agent-based exchange economy, we measure the loss of wealth for rational agents due to the presence of varying proportions of subrational (boundedly rational) traders that do not know all the needed parameters. We consider two departures from rationality: M-traders use private, stochastic and unbiased signals to build an estimate of the value of the risky asset; chartists only use the last observed price. The exchange takes place using a realistic continuous double auction. We show by numerical simulations that M-traders? subrational behavior does not reduce the wealth of the rational agents. On the contrary, a sizable fraction of chartists can lead to mispricing of the risky asset and to a reduction of the wealth share of the rational traders. Moreover, as chartists perceive a higher wealth than the others, due to wrong estimates of the fundamental value, their fraction in the market may not dissolve in the long run.
    Keywords: risk sharing; boundedly rationality; cost of subrational trading; agent-based markets
    Date: 2008–03–01
    URL: http://d.repec.org/n?u=RePEc:uts:rpaper:217&r=dge
  4. By: Azomahou, Théophile (UNU-MERIT); Boucekkine, Raouf (CORE, Universite Catholique de Louvain); Nguyen-Van, Phu (CNRS, Université de Cergy-Pontoise,)
    Abstract: We develop a general equilibrium vintage capital model with embodied energy-saving technological progress and an explicit energy market to study the impact of investment subsidies on investment and output. Energy and capital are assumed to be complementary in the production process. New machines are less energy consuming and scrapping is endogenous. It is shown that the impact of investment subsidies heavily depends on the structure of the energy market, the mechanism explaining this outcome relying on the tight relationship between the lifetime of capital goods and energy prices via the scrapping conditions inherent to vintage models. In particular, under a free entry structure for the energy sector, investment subsidies boost investment, while the opposite result emerges under natural monopoly if increasing returns in the energy sector are not strong enough.
    Keywords: Energy-saving, Technological change, Vintage capital, Energy market, Natural monopoly, Investment subsidies
    JEL: E22 O40 Q40
    Date: 2008
    URL: http://d.repec.org/n?u=RePEc:dgr:unumer:2008032&r=dge
  5. By: Michael B. Devereux; Shouyong Shi
    Abstract: While in principle, international payments could be carried out using any currency or set of currencies, in practice, the US dollar is predominant in international trade and financial flows. The dollar acts as a `vehicle currency' in the sense that agents in non-dollar economies will generally engage in currency trade indirectly using the US dollar rather than using direct bilateral trade among their own currencies. Indirect trade is desirable when there are transactions costs of exchange. This paper constructs a dynamic general equilibrium model of a vehicle currency. We explore the nature of the efficiency gains arising from a vehicle currency, and show how this depends on the total number of currencies in existence, the size of the vehicle currency economy, and the monetary policy followed by the vehicle currency's government. We find that there can be very large welfare gains to a vehicle currency in a system of many independent currencies. But these gains are asymmetrically weighted towards the residents of the vehicle currency country. The survival of a vehicle currency places natural limits on the monetary policy of the vehicle country.
    Keywords: Vehicle currency; Transactions cost; Welfare gains
    JEL: F40 F30 E42
    Date: 2008–04–25
    URL: http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-315&r=dge

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