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on Dynamic General Equilibrium |
| By: | Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante |
| Abstract: | In recent decades, the US wage structure has been transformed by a rising college premium, a narrowing gender gap, and increasing persistent and transitory residual wage dispersion. This paper explores the implications of these changes for cross-sectional inequality in hours worked, earnings and consumption, and for welfare. The framework for the analysis is an incomplete-markets overlapping-generations model in which individuals choose education and form households, and households choose consumption and intra-family time allocation. An explicit production technology underlies equilibrium prices for labor inputs differentiated by gender and education. The model is parameterized using micro data from the PSID, the CPS and the CEX. With the changing wage structure as the only primitive force, the model can account for the key trends in cross-sectional US data. We also assess the role played by education, labor supply, and saving in providing insurance against shocks, and in exploiting opportunities presented by changes in the relative prices of different types of labor. |
| JEL: | E21 I21 I31 J2 J31 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14052&r=dge |
| By: | Ramon Marimon; Vincenzo Quadrini |
| Abstract: | We develop a dynamic general equilibrium model with two-sided limited commitment to study how barriers to competition, such as restrictions to business start-up, affect the incentive to accumulate human capital. We show that a lack of contract enforceability amplifies the effect of barriers to competition on human capital accumulation. High barriers reduce the incentive to accumulate human capital by lowering the outside value of ‘skilled workers’, while low barriers can result in over-accumulation of human capital. This over-accumulation can be socially optimal if there are positive knowledge spillovers. A calibration exercise shows that this mechanism can account for significant cross-country income inequality. |
| Keywords: | Limited commitment, limited enforcement, human capital accumulation, income inequality, innovation, barriers to competition. |
| JEL: | D99 E20 J24 O15 O34 O43 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2008/21&r=dge |
| By: | Wolfram J. Horneff; Raimond H. Maurer; Olivia S. Mitchell; Michael Z. Stamos |
| Abstract: | This paper shows how lifelong survival-contingent payouts can enhance investor wellbeing in the context of a portfolio choice model which integrates uninsurable labor income and asymmetric mortality expectations. Our model generates optimal asset location patterns indicating how much to hold in liquid versus illiquid survival-contingent payouts over the lifetime, and also asset allocation paths, showing how to invest in stocks versus bonds. We confirm that the investor will gradually move money out of her liquid saving into survival-contingent assets to retirement and beyond, thereby enhancing her welfare by as much as 50 percent. The results are also robust to the introduction of uninsurable consumption shocks in housing expenses, income flows during the worklife and retirement, sudden changes in health status, and medical expenses. |
| JEL: | G11 G22 G23 H55 J26 J32 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14055&r=dge |
| By: | Takao Kobayashi (Faculty of Economics, University of Tokyo); Risa Sai (Graduate School of Economics, University of Tokyo); Kazuya Shibata (Nomura Asset Management Co., Ltd.) |
| Abstract: | This study examines life-cycle optimal consumption and asset allocation in the presence of human capital. Labor income seems like a "money market mutual fund" whose balance in one or two years is predictable but a wide dispersion results after many years, reflecting fluctuations in economic conditions. We use the Martingale method to derive an analytical solution, finding that Merton's well-known " constant-mix strategy" is still true after incorporating human capital from the perspective of "total wealth" management. Moreover, the proportion in risky assets implicit in the agent's human capital is the main factor determining the optimal investment strategy. The numerical examples suggest that young investors should short stocks because their human capital has large market exposure. As they age, however, their human capital becomes "bond-like", and thus they have to hold stocks to achieve optimal overall risk exposure. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2008cf565&r=dge |
| By: | Deren Unalmis, Ibrahim Unalmis and Derya Filiz Unsal |
| Abstract: | Since the beginning of 2000s the world economy has witnessed a sub-stantial increase in oil prices, which is seen to be an important source of economic fluctuations, causing high inflation, unemployment and low or negative growth rates. Recent experience, however, has not validated this view. Despite rising oil prices, world output growth has been strong, and although inflation has recently been increasing, it is relatively much lower compared with the 1970s. This paper focuses on the causes of oil price increases and their macroeconomic effects. Different from most of the recent literature on the subject, which understands the price of oil to be an exogenous process, we model the price of oil endogenously within a dynamic stochastic general equilibrium (DSGE) framework. Specifically, using a new Keynesian small open economy model, we analyse the effects of an increase in the price of oil caused by an oil supply shock and an oil demand shock. Our results indicate that the effects of an oil demand shock and an oil supply shock on the small open economy are quite different. In addition, we investigate the sensitivity of the general equilibrium outcomes to the degrees of oil dependence and openness, as well as the strength of the response of monetary policy authority to the inflation. Finally, we evaluate the welfare implications of alternative monetary policy regimes. |
| Keywords: | Oil price, small open economy, demand and supply shocks |
| JEL: | C68 E12 F41 F42 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:08/13&r=dge |
| By: | Théophile T. Azomahou (UNU-MERIT, Maastricht University, The Netherlands); Raouf Boucekkine (UCLouvain, Belgium; and University of Glasgow, UK); Phu Nguyen-Van (THEMA-CNRS, Université de Cergy-Pontoise, France) |
| 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 progress; vintage capital; energy market; natural monopoly; investment subsidies |
| JEL: | E22 O40 Q40 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dpc:wpaper:1508&r=dge |
| By: | Vasco Gabriel (University of Surrey); Paul Levine (University of Surey); Christopher Spencer (University of Surrey); Bo Yang (University of Surrey) |
| Abstract: | The relevance of direct supply-side effects of monetary policy in a New Keynesian DSGE model is studied. We extend a model with several nominal and real frictions by introducing a cost channel of monetary transmission and allowing for non-separability of money and consumption in the utility of the representative household. These fea- tures have important theoretical consequences for the output-inflation trade-off and indeterminacy of interest rate rules. The empirical evidence for these effects are then examined using a Bayesian maximum likelihood framework complemented with GMM single-equation estimation. Both estimation strategies point to weak evidence for the cost channel and non-separable utility. |
| Keywords: | New Keynesian model, Bayesian maximum likelihood estimation, GMM, non-separable utility, cost channel. |
| JEL: | E42 E52 C11 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0408&r=dge |
| By: | Paul Söderlind |
| Abstract: | A simple consumption-based two-period model is used to study the (theoretical) effects of disagreement on asset prices. Analytical and numerical results show that individual uncertainty has a much larger effect on risk premia than disagreement if (i) the risk aversion is reasonably high and (ii) individual uncertainty is not much smaller than disagreement. Evidence from survey data on beliefs about output growth suggests that the latter is more than satisfied. |
| Keywords: | riskfree rate, implied volatility, Survey of Professional Forecasters |
| JEL: | C42 G12 E44 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2008:2008-11&r=dge |
| By: | Orazio P. Attanasio; Monica Paiella (-) |
| Abstract: | This paper builds a unifying framework based on the theory of intertemporal consumption choices that brings together the limited participation-based explanation of the C-CAPM poor empirical per- formance and the transaction costs-based explanation of incomplete portfolios. Using the implications of the consumption model and ob- served household consumption and portfolio choices, we identify the preference parameters of interest and a lower bound for the costs ra- tionalizing non-participation in nancial markets. Using the US Con- sumer Expenditure Survey and assuming isoelastic preferences, we es- timate the coe¢ cient of relative risk aversion at 1.7 and a cost bound of 0.4 percent of non-durable consumption. Our estimate of the pref- erence parameter is theoretically plausible and the bound su¢ ciently small to be likely to be exceeded by the actual total (observable and unobservable) costs of participating in nancial markets. |
| Keywords: | limited participation in financial markets, fi xed participation costs, Euler equation for consumption |
| Date: | 2008–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:prt:dpaper:1_2008&r=dge |
| By: | Azomahou, Theophile (UNU-MERIT) |
| Abstract: | In this paper, a simple general equilibrium model à la Solow is developed to capture the impact of AIDS on economic growth. To this end, a benchmark model due to Cuddington and Hancock (1994) is extended in various directions. In particular, the sharply declining life expectancy patterns are clearly re°ected in the enlarged model through a generic Ben-Porath mechanism. AIDS-related health expenditures are incorporated as well. Using up-do-date optimal forecasting methods, the model applied to South Africa shows that while a relatively short term assessment might not reveal any dramatic AIDS growth e®ect, the medium/long run impact can be truly devastating. In particular, the heavy trends in mortality and life expectancy currently induced by AIDS are shown to be potentially at least twice more detrimen-tal for per capita economic growth in the period 2020-2030 compared to 2000-2010. |
| Keywords: | Epidemics, Life Expectancy, Economic Growth, AIDS |
| JEL: | C61 C62 O41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:unumer:2008038&r=dge |
| By: | Karin Mayr (Department of Economics, Johannes Kepler University Linz, Austria) |
| Abstract: | Sectoral labor supply shortage is a cause of concern in many OECD countries and has raised support for immigration as a potential remedy. In this paper, we derive a general equilibrium model with overlapping generations, where natives require a compensating wage differential for working in one sector rather than in another. We identify price and wage effects of immigration on three different groups of natives: the young working in one of two sectors and the old. We determine the outcome of a majority vote on immigration into a given sector as well as the social optimum. The main findings are that i) the old determine the majority voting outcome of positive immigration into both sectors, if natives are not mobile across sectors, ii) the young determine the majority voting outcome of zero immigration into both sectors, if natives are mobile across sectors, iii) the social optimum is smaller than or equal to the majority voting outcome, and iv) sector-specific immigration is not always a substitute for native mobility across sectors. |
| Keywords: | immigration, political economy, welfare, sectoral mobility |
| JEL: | F22 J31 J61 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2008_07&r=dge |