nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒06‒21
seventeen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Overlapping Generations Models of General Equilibrium By John Geanakoplos
  2. Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model By Ruediger Bachmann; Ricardo J. Caballero; Eduardo Engel
  3. Progressive Taxation, Wealth Distribution, and Macroeconomic Stability By Kazuo Mino; Yasuhiro Nakamoto
  4. How Important are Financial Frictions in the U.S. and the Euro Area? By Queijo von Heideken, Virginia
  5. The Timing of Redistribution By Juergen Jung
  6. Inventory Cycles By Katsuyuki Shibayama
  7. Rejuveniles and Growth By Richard C. Barnett; Joydeep Bhattacharya
  8. Optimal Government Spending and Unemployment By Ludger Linnemann; Andreas Schabert
  9. Resurrecting Equilibria Through Cycles By Richard C. Barnett; Joydeep Bhattacharya; Helle Bunzel
  10. Wealth and the Capitalist Spirit By Johanna Francis
  11. Heterogeneous Agents, Human Capital Formation and International Income Inequality By Haris Munandar
  12. In Search of a Theory of Debt Management By Faraglia, Elisa; Marcet, Albert; Scott, Andrew
  13. Aid volatility, monetary policy rules and the capital account in African economies By Christopher Adam; Stephen O'Connell; Edward Buffie
  14. Volatility, Growth and Labour Elasticity By Annicchiarico, B.; Corrado, L.; Pelloni, .
  15. Labour Markets and Productivity in Developing Countries By Mathan Satchi; Jonathan Temple
  16. Incorporating judgement with DSGE models By Jaromír Beneš; Andrew Binning; Kirdan Lees
  17. Political Economy of Ramsey Taxation By Daron Acemoglu; Michael Golosov; Aleh Tsyvinski

  1. By: John Geanakoplos
    Date: 2008–06–10
  2. By: Ruediger Bachmann (Yale University); Ricardo J. Caballero (MIT); Eduardo Engel (Cowles Foundation, Yale University)
    Abstract: The sensitivity of U.S. aggregate investment to shocks is procyclical: the initial response increases by approximately 50% from the trough to the peak of the business cycle. This feature of the data follows naturally froma DSGE model with lumpy microeconomic capital adjustment. Beyond explaining this specific time variation, our model and evidence provide a counterexample to the claim that microeconomic investment lumpiness is inconsequential for macroeconomic analysis.
    Keywords: Ss model, RBC model, Time-varying impulse response function, History dependence, Conditional heteroscedasticity, Aggregate shocks, Sectoral shocks, Idiosyncratic shocks, Adjustment costs
    JEL: E10 E22 E30 E32 E62
    Date: 2008–06
  3. By: Kazuo Mino (Graduate School of Economics, Osaka University); Yasuhiro Nakamoto (Graduate School of Economics, Osaka University)
    Abstract: Using the standard neoclassical growth model with two types of agents, we examine how the presence of heterogenous agents affects the stabilization role of progressive income taxation. We first show that if the marginal tax payment of each agent increases with her relative income, the steady state satisfies local saddlepoint stability so that the equilibrium is determinate. However, unlike the representative agent models with progressive taxation, our model with heterogeneous agents may have the possibility of equilibrium indeterminacy. The indeterminacy conditions depend not only on the property of tax functions but also on production and preference structures.
    Keywords: heterogeneous agents, progressive taxation, wealth distribution, aggregate stability
    JEL: E52 O42
    Date: 2008–05
  4. By: Queijo von Heideken, Virginia (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper aims to evaluate if frictions in credit markets are important for business cycles in the U.S. and the Euro area. For this purpose, I modify the DSGE financial accelerator model developed by Bernanke, Gertler and Gilchrist (1999) by adding frictions such as price indexation to past inflation, sticky wages, consumption habits and variable capital utilization. When I estimate the model with Bayesian methods, I find that financial frictions are relevant in both areas. According to the posterior odds ratio, the data clearly favors the model with financial frictions both in the U.S. and the Euro area. Moreover, consistent with common perceptions, financial frictions are larger in the Euro area.
    Keywords: Financial frictions; DSGE models; Bayesian estimation
    JEL: C11 C15 E32 E40 E50 G10
    Date: 2008–05–01
  5. By: Juergen Jung (Indiana University Bloomington)
    Abstract: We investigate whether late redistribution programs that can be targeted towards low income families can “dominate” early redistribution programs that cannot be targeted due to information constraints. We use simple two- period OLG models with heterogenous agents under six policy regimes: A model calibrated to the U.S. economy (benchmark), two early redistribution (lump sum) regimes, two (targeted) late redistribution regimes, and finally a model without taxes and redistribution. Redistribution programs are financed by a labor tax on the young and a capital tax on the old generation. We argue that late redistribution, if the programs are small in size, can dominate early redistribution in terms of welfare but not in terms of real output. Better targeting of low income households cannot offset savings distortions. In addition we find that optimal tax policy includes a positive capital tax rate.
    Keywords: Taxation Timing, Transfer Timing, Redistribution, Capital Accumulation, Optimal Taxation, Capital Taxation
    JEL: H20 H22
    Date: 2008–06
  6. By: Katsuyuki Shibayama
    Abstract: This paper investigates a rational dynamic stochastic general equilibrium model with a stockout constraint and a production chain. Our model shows that both stockout avoidance and cost shock mechanisms replicate stylised inventory facts -- production is more volatile than sales and inventory investment is procyclical. In addition, production smoothing also works at very high frequencies. Note that the cost shock and production smoothing mechanisms are naturally embedded in our micro-founded general equilibrium framework. Moreover, as a by-product, the production chain causes the slow adjustment of inventories in aggregate. Consequently, our model generates (a) high labour volatility and (b) low correlation between labour productivity and output; the standard RBC cannot produce these two empirical findings. Finally, our model yields inventory cycles.
    Keywords: inventories; inventory cycles; stockout constraint; production chain; over-damped oscillations; dyanamic stochastic general equilibrium model
    JEL: E32 C68
    Date: 2008–02
  7. By: Richard C. Barnett; Joydeep Bhattacharya (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: Rejuveniles are "people who cultivate tastes and mind-sets tradi- tionally associated with those younger than themselves." (Noxon, 2006) In this paper, we study a standard AK growth model of overlapping generations populated by rejuve- niles. For our purposes, rejuveniles are old agents who derive utility from "keeping up" their consumption with that of the current young. We find that such cross-generational keeping up is capable of generating interesting equilibrium growth dynamics, including growth cycles. No such growth dynamics is possible either in the baseline model, one where no such generational consumption externality exists, or for almost any other form of keeping up. Steady-state growth in a world with rejuveniles may be higher than that obtained in the baseline model
    Keywords: Growth cycles, keeping up preferences, consumption externality
    JEL: E13 E32
    Date: 2007–09–19
  8. By: Ludger Linnemann (University of Bonn); Andreas Schabert (University of Dortmund)
    Abstract: We study optimal government spending in a business cycle model with frictional unemployment. The Ramsey optimal policy is contrasted with a reference policy which would be first best in a frictionless economy. Results are: the Ramsey policy i) implies a higher steady state ratio of government spending to private consumption than the reference policy; ii) is procyclical under technology shocks and countercyclical under demand shocks (while the public spending ratio to private consumption is always countercyclical); iii) stabilizes employment, in some cases even at the cost of higher consumption volatility; iv) is qualitatively unaltered in a sticky price version with jointly optimal monetary and fiscal policy.
    Keywords: Optimal fiscal policy; government spending; labor market frictions; unemployment; stabilization policy
    JEL: E62 E32
    Date: 2008–03–06
  9. By: Richard C. Barnett; Joydeep Bhattacharya; Helle Bunzel (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: In an overlapping generations model, momentary equilibria are defined as points that lie on the intergenerational offer curve, i.e., they satisfy agents’ optimality conditions and market clearing at any date. However, some dynamic sequences commencing from such points may not be considered valid equilibria because they asymptotically violate some economic restriction of the model. The literature has always ruled out such paths. This paper studies a pure-exchange monetary overlapping generations economy in which real balances cycle forever between momentary equilibrium points. The novelty is to show that segments of the offer curve that have been previously ignored, can in fact be used to produce asymptotically valid cyclical paths. Indeed, a cycle can bestow dynamic validity on momentary equilibrium points that had erstwhile been classified as dynamically invalid.
    Keywords: overlapping generations models, monetary equilibria, cycles, minimum consumption requirements
    JEL: E31 E42 E63
    Date: 2007–09–19
  10. By: Johanna Francis (Fordham University, Department of Economics)
    Abstract: The wealth distribution in the U.S. is more unequal than either the income or earnings distribution, a fact current models of saving behavior have difficulty explaining. Using MaxWeber’s (1905) idea that individuals may have a ‘capitalist spirit’, I construct and simulate a model where individuals accumulate wealth for its own sake rather than as deferred consumption. Including capitalist-spirit preferences in a simple life cycle model, with no other modifications, generates a skewness of wealth consistent with that observed in the U.S. economy. Furthermore, capitalist-spirit preferences provide a way to generate decreasing risk aversion with increases in wealth without resorting to idiosyncratic rates of time preference.
    Keywords: capitalist spirit, life cycle, wealth
    JEL: D31 E21 J23
    Date: 2008
  11. By: Haris Munandar (Bureau of Economic Research, Bank of Indonesia, Jakarta)
    Abstract: The paper examines the effect of heterogeneity in individual human capital formation on cross-country income inequality. It considers a two-country model of overlapping generation heterogeneous economies with the following features: (1) individuals are heterogeneous with respect to inborn ability and parental human capital; (2) intergenerational transfers take place via public investment in education financed by tax, and parental education; (3) due to variation in individual human capital, we have endogenous heterogeneity both in labor supply and in parents’ participation in self-educating their offspring. Besides exploring cross-country variation in public education, how its low level can lead to a poverty trap and how its high level can result in an increasing society’s effective human capital, we study the effects of capital markets integration, in equilibrium, on the intra-generational income inequality in both the investing and receiving countries.
    Keywords: Heterogenous Agents; Human Capital; Poverty Efrap; Income Inequality
    JEL: D91 E25 H52
    Date: 2008–02–01
  12. By: Faraglia, Elisa; Marcet, Albert; Scott, Andrew
    Abstract: A growing literature integrates theories of debt management into models of optimal fiscal policy. One promising theory argues that the composition of government debt should be chosen so that fluctuations in the market value of debt offset changes in expected future deficits. This complete market approach to debt management is valid even when the government only issues non-contingent bonds. A number of authors conclude from this approach that governments should issue long term debt and invest in short term assets. We argue that the conclusions of this approach are too fragile to serve as a basis for policy recommendations. This is because bonds at different maturities have highly correlated returns, causing the determination of the optimal portfolio to be ill-conditioned. To make this point concrete we examine the implications of this approach to debt management in various models, both analytically and using numerical methods calibrated to the US economy. We find the complete market approach recommends asset positions which are huge multiples of GDP. Introducing persistent shocks or capital accumulation only worsens this problem. Increasing the volatility of interest rates through habits partly reduces the size of these positions but at the cost of introducing extreme volatility in asset holdings. Across these simulations we find no presumption that governments should issue long term debt - policy recommendations can be easily reversed through small perturbations in the specification of shocks or small variations in the maturity of bonds issued. We further extend the literature by removing the assumption that governments every period costlessly repurchase all outstanding debt. This exacerbates the size of the required positions, worsens their volatility and in some cases produces instability in debt holdings. We conclude that it is very difficult to insulate fiscal policy from shocks by using the complete markets approach to debt management. Given the limited variability of the yield curve using maturities is a poor way to substitute for state contingent debt. The result is the positions recommended by this approach conflict with a number of features that we believe are important in making bond markets incomplete e.g allowing for transaction costs, liquidity effects, etc..Until these features are all fully incorporated we remain in search of a theory of debt management capable of providing robust policy insights.
    Keywords: Complete Markets; Debt Management; Government Debt; Maturity Structure; Yield Curve
    JEL: E43 E62
    Date: 2008–06
  13. By: Christopher Adam (University of Oxford); Stephen O'Connell (Swarthmore College); Edward Buffie (Indiana University)
    Abstract: We examine the properties of simple quantity-based monetary policy rules of the kind widely used in low-income African economies. Using a DSGE model and focusing our attention on responses to positive aid shocks, we suggest that policy rules involving substantial reserve accumulation in the face of aid surges serve to ease macroeconomic adjustment to shocks, particularly when a portion of aid is used to support fiscal adjustment. These rules are robust to assumptions about the degree of integration of the domestic public debt market with world capital markets. Although an open capital account facilitates smoother adjustment to temporary aid surges when an aid inflow is fully spent, it exacerbates the adjustment problem when aid is accompanied by fiscal adjustment and hence reinforces the case for a managed float in such circumstances.
    Keywords: Monetary policy, Africa, Aid volatility, foreign capital flows, stochastic simulation models
    Date: 2008–06
  14. By: Annicchiarico, B.; Corrado, L.; Pelloni, .
    Abstract: We study the relationship between growth and variability in a DSGE model with nominal rigidities and growth driven by learning-by-doing. We show that this relationship may be positive or negative depending on the impulse source of fluctuations. A key role is also played by the Frisch elasticity of labour supply and by institutional features of the labour market. Our general findings are that monetary shocks volatility will generally have a negative effect on growth, while the opposite tends to be true for fiscal and productivity shocks. These .ndings are consistent with the existing empirical evidence: data show, in fact, a some- what ambiguous relationship between output growth and real variability, but a generally negative relationship between output growth and nominal variabilit.
    Keywords: Growth; Volatility; Monetary and Real Shocks; Labour Supply Elasticity.
    JEL: O42 C63
    Date: 2008–04
  15. By: Mathan Satchi; Jonathan Temple
    Abstract: In middle-income countries, the informal sector often accountes for a substantial fraction of the urban labour force. We develop a general equilibrium model with matching frictions in the urban labour market, the possibility of self-employment in the informal sector, and scope for rural-urban migration. We investigate the effects of different types of growth on wages and the informal sector, and the extent to which labour market institutions can influence aggregate productivity. We quantify these effects by calibrating the model to data for Mexico.
    Keywords: informal sector, urban unemployment, dual economies, matching frictions
    JEL: J40 O10
    Date: 2008–02
  16. By: Jaromír Beneš; Andrew Binning; Kirdan Lees (Reserve Bank of New Zealand)
    Abstract: Central bank policymakers often cast judgement about macroeconomic forecasts in reduced form terms, basing this on off-model information that is not easily mapped to a structural DSGE framework. We show how to compute forecasts conditioned on policymaker judgement that are the most likely conditional forecasts from the perspective of the DSGE model, thereby maximising the influence of the model structure on the forecasts. We suggest using a simple implausibility index to track the magnitude and type of policymaker judgement. This is based on the structural shocks required to return policymaker judgement. We show how to use the methods for practical use in the policy environment and also apply the techniques to condition DSGE model forecasts on: (i) the long history of published forecasts from the Reserve Bank of New Zealand; (ii) constant interest rate forecasts; and (iii) inflation forecasts from a Bayesian VAR currently used in the policy environment at the Reserve Bank of New Zealand.
    Keywords: DSGE models; monetary policy; conditional forecasts
    JEL: C51 C53
    Date: 2008–06
  17. By: Daron Acemoglu; Michael Golosov; Aleh Tsyvinski
    Date: 2008–06–09

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