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on Dynamic General Equilibrium |
| By: | Marco Del Negro; Frank Schorfheide |
| Abstract: | This paper estimates a small open-economy dynamic stochastic general equilibrium (DSGE) model, specified along the lines of Galí and Monacelli (2005) and Lubik and Schorfheide (2007), using Chilean data for the full inflation-targeting period of 1999 to 2007. We study the specification of the policy rule followed by the Central Bank of Chile, the dynamic response of inflation to domestic and external shocks, and the change in these dynamics under different policy parameters. We use the DSGE-VAR methodology from our earlier work (2007) to assess the robustness of the conclusion to the presence of model misspecification. |
| Keywords: | Stochastic analysis ; Time-series analysis ; Econometric models ; Banks and banking, Central ; Monetary policy |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:329&r=dge |
| By: | Jang-Ting Guo; Kevin J. Lansing |
| Abstract: | This paper examines the quantitative relationship between the elasticity of capital-labor substitution and the conditions needed for equilibrium indeterminacy (and belief-driven fluctuations) in a one-sector neoclassical growth model. Our analysis employs a “normalized” version of the CES production function so that all steady-state allocations and factor income shares are held constant as the elasticity of substitution is varied. We demonstrate numerically that higher elasticities cause the threshold degree of increasing returns for indeterminacy to decline monotonically, albeit very gradually. When the elasticity of substitution is unity (the Cobb-Douglas case), our model requires increasing returns to scale of around 1.08 for indeterminacy. When the elasticity of substitution is raised to 5, which far exceeds any empirical estimate, the threshold degree of increasing returns reduces to around 1.05. We also demonstrate analytically that labor’s share of income becomes procyclical as the elasticity of substitution increases above unity, whereas labor’s share in postwar U.S. data is countercyclical. This observation, together with other empirical evidence, indicates that the elasticity of capital-labor substitution in the U.S. economy is actually below unity. |
| Keywords: | Capital ; Labor supply |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-06&r=dge |
| By: | Patrick A. Pintus; Yi Wen |
| Abstract: | This paper resuscitates the credit-cycle theory of Kiyotaki and Moore (1997) in a two-agent RBC model with conventional preferences and standard neoclassical technologies. It is shown that small transitory shocks to credit demand (or supply) can generate large, highly persistent, dampened cycles in aggregate output. Key to our results is the interaction between credit constraints and habit formation. Credit constraints based on collateralized assets mainly amplify the impact of shocks while habit formation in consumption demand mainly propagates it. Hump-shaped boom-bust cycles do not arise in the model under standard parameter values if either one of the two elements is missing. |
| Keywords: | Credit |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-014&r=dge |
| By: | Ferre De Graeve |
| Abstract: | The central variable of theories of financial frictions--the external finance premium--is unobservable. This paper distils the external finance premium from a DSGE model estimated on U.S. macroeconomic data. Within the DSGE framework, movements in the premium can be given an interpretation in terms of shocks driving business cycles. A key result is that the estimate--based solely on nonfinancial macroeconomic data--picks up over 70 percent of the dynamics of lower grade corporate bond spreads. The paper also identifies a gain in fitting key macroeconomic aggregates by including financial frictions in the model and documents how shock transmission is affected. |
| Keywords: | Financial markets ; Corporate bonds ; Corporations - Finance |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:0809&r=dge |
| By: | Guillaume Rocheteau; Ricardo Lagos |
| Abstract: | We develop a search-theoretic model of financial intermediation and use it to study how trading frictions affect the distribution of asset holdings, asset prices, efficiency and standard measures of liquidity. A distinctive feature of our theory is that it allows for unrestricted asset holdings, so market participants can accommodate trading frictions by adjusting their asset positions. We show that these individual responses of asset demands constitute a fundamental feature of illiquid markets: they are a key determinant of bid-ask spreads, trade volume and trading delays—all the dimensions of market liquidity that search-based theories seek to explain. |
| Keywords: | Liquidity (Economics) ; Over-the-counter markets ; Investments |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0804&r=dge |
| By: | Ekkehard Ernst; Timo Teuber |
| Abstract: | An overlapping-generations model with search unemployment is calibrated for the Netherlands to assess the impact of tax-benefit reforms on labour supply. Several reforms are analysed, in particular the introduction of a flat tax and pension reforms. The model demonstrates the potential of these reforms to raise labour supply. In particular, pension reforms, such as lowering replacement rates for pensioners, help to boost participation rates of older workers. On the other hand, a flat tax would promote longer working hours across the board, thereby rising labour supply. However, the introduction of a flat tax is a costly measure and would increase the primary general government deficit by close to 2% of GDP. Simultaneous measures to lower the structural unemployment rate would not only help to avoid adverse effects of such a tax reform on the fiscal balance but would strengthen further the positive effects of a flat tax on working hours. <P>Le système des impôts et des transferts sociaux néerlandais et l’emploi pendant le cycle de vie : Résultats et options de réformes <BR>Un modèle à générations imbriquées avec chômage d’équilibre est calibré pour les Pays-Bas afin d’évaluer l’impact des réformes du système d’imposition et de transferts sociaux sur l’offre du travail. Plusieurs réformes sont analysées, en particulier l’introduction d’un impôt à taux unique et des réformes du système des retraites. Le modèle montre le potentiel de ces réformes pour augmenter l’offre du travail. En particulier, les réformes du système des retraites visant à diminuer le taux de remplacement des retraites permettent d’augmenter l’offre du travail des seniors. De l’autre côté, un impôt à taux unique permettrait d’augmenter le nombre d’heures travaillées par personne, ce qui augmenterait l’offre du travail. Néanmoins, introduire un tel impôt est une mesure couteuse et augmenterait le déficit primaire de près de 2% du PIB. Des mesures simultanées de réduire le taux de chômage structurel permettraient de contrebalancer des effets adverses d’une telle réforme des impôts sur le solde budgétaire et augmenterait en même temps son effet positif sur le nombre d’heures travaillées. |
| Keywords: | tax reform, Netherlands, Pays-Bas, pension reform, réforme du système de retraite, overlapping generation model, modèle à générations imbriquées, dynamic tax-benefit policies, equilibrium unemployment, labour market search frictions, politiques fiscales dynamiques, chômage d’équilibre, frictions d’appariement du marché du travail, réformes du système des impôts |
| JEL: | D91 E24 J26 J64 |
| Date: | 2008–06–19 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:617-en&r=dge |
| By: | Takumi Naito (Tokyo Institute of Technology); Laixun Zhao (Research Institute for Economics and Business Administration, Kobe University) |
| Abstract: | We formulate a two-country, two-good, two-factor, two-period-lived overlapping generations model to examine how population aging determines the pattern of and gains from trade. We obtain two main results. First, the aging country endogenously becomes a small country exporting the capital-intensive good, whereas the younger country endogenously dominates the world economy determining the world prices, in the free trade steady state. Second, although uncompensated free trade cannot be Pareto superior to autarky, there exists a compensation scheme applied within each country such that free trade is Pareto superior to autarky. |
| Keywords: | Aging and trade, Gains from trade, Overlapping generations model, Transitional dynamics, Compensation scheme |
| JEL: | F43 J11 O41 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:215&r=dge |
| By: | Nicole Walter; Runli Xie |
| Abstract: | Empirical observations show that education helps to protect against labor market risks. This is twofold: The higher educated face a higher expected wage income and a lower probability of being unemployed. Although this relationship has been analyzed in the literature broadly, several questions remain to be tackled. This paper contributes to the existing literature by looking at the above mentioned phenomena from a purely theoretic perspective and in a European context. We set up a model with search-and-matching frictions, collective bargaining and monopolistic competition in the product market. Workers are heterogeneous in their human capital level. It is shown that higher human capital increases the wage rate and reduces unemployment risks, which is consistent with empirical observations for European countries. |
| Keywords: | human capital, search frictions, collective bargaining, monopolistic competition |
| JEL: | E24 J24 J52 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2008-039&r=dge |
| By: | Strulik, Holger |
| Abstract: | This paper proposes a model that links households and firms, as usual, by markets for factors and goods and, additionally, by a banking sector that channels households' funds to firms and eliminates idiosyncratic risk. In equilibrium, agency costs and tax benefits of corporate debt are equalizing each other, which renders an institutionally based explanation of financial structure. Adjustment of corporate finance adds to the ordinary savings channel of fiscal and monetary policy. Taking real and financial interactions into account, the model predicts a somewhat lower impact of fiscal policy on macroeconomic aggregates as commonly assessed and a much stronger impact of monetary policy. This amplification is caused by the banking sector's translation of borrowing rates into lending rates and vice versa. |
| Keywords: | Fiscal Policy, Monetary Policy, Corporate Finance, Agency Costs, Banking, Economic Growth, Business Cycles. |
| JEL: | E44 E52 E62 O16 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-402&r=dge |
| By: | Takashi Kano (University of Tokyo) |
| Abstract: | A recent paper claims that habit formation in consumption plays an important role in current account fluctuations in selected developed countries, extending the present-value model of the current account (PVM) with consumption habits. In this paper, however, I show that the habit-forming PVM is observationally equivalent to the PVM augmented with persistent transitory consumption, which is induced by world real interest rate shocks. Based on a small open-economy real business cycle (SOE-RBC) model endowed with consumption habits as well as persistent world real interest rate shocks, this paper resolves the inherent identification problem of the habit-forming PVM by Bayesian methods to seek effects of habit formation on current account fluctuations in typical small open economies, Canada and the United Kingdom. Results reveal no clear evidence that habit formation plays a crucial role in current account fluctuations. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2008cf572&r=dge |
| By: | Martin Møller Andreasen (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | The presence of i) stochastic trends, ii) deterministic trends, and/or iii) stochastic volatil- ity in DSGE models may imply that the agents' objective functions attain infinite values. We say that such models do not have a valid micro foundation. The paper derives sufficient condi- tions which ensure that the objective functions of the households and the firms are finite even when various trends and stochastic volatility are included in a standard DSGE model. Based on these conditions we test the validity of the micro foundation in six DSGE models from the literature. The models of Justiniano & Primiceri (American Economic Review, forth- coming) and Fernández-Villaverde & Rubio-Ramírez (Review of Economic Studies, 2007) do not satisfy these sufficient conditions, or any other known set of conditions ensuring finite values for the objective functions. Thus, the validity of the micro foundation in these models remains to be established. |
| Keywords: | Deterministic trends, DSGE models, Error distributions, Moment generating functions, Stochastic trends, Stochastic volatility, Unit-roots |
| JEL: | E10 E30 |
| Date: | 2008–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2008-26&r=dge |
| By: | Martin Møller Andreasen (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | This paper extends two optimization routines to deal with objective functions for DSGE models. The optimization routines are i) a version of Simulated Annealing developed by Corana, Marchesi & Ridella (1987), and ii) the evolutionary algorithm CMA-ES developed by Hansen, Müller & Koumoutsakos (2003). Following these extensions, we examine the ability of the two routines to maximize the likelihood function for a sequence of test economies. Our results show that the CMA- ES routine clearly outperforms Simulated Annealing in its ability to find the global optimum and in efficiency. With 10 unknown structural parameters in the likelihood function, the CMA-ES routine finds the global optimum in 95% of our test economies compared to 89% for Simulated Annealing. When the number of unknown structural parameters in the likelihood function increases to 20 and 35, then the CMA-ES routine finds the global optimum in 85% and 71% of our test economies, respectively. The corresponding numbers for Simulated Annealing are 70% and 0%. |
| Keywords: | CMA-ES optimization routine, Multimodel objective function, Nelder-Mead simplex routine, Non-convex search space, Resampling, Simulated Annealing |
| JEL: | C61 C88 E30 |
| Date: | 2008–06–19 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2008-32&r=dge |
| By: | Martin Møller Andreasen (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | This paper shows how non-linear DSGE models with potential non-normal shocks can be estimated by Quasi-Maximum Likelihood based on the Central Difference Kalman Filter (CDKF). The advantage of this estimator is that evaluating the quasi log-likelihood function only takes a fraction of a second. The second contribution of this paper is to derive a new particle filter which we term the Mean Shifted Particle Filter (MSPFb). We show that the MSPFb outperforms the standard Particle Filter by delivering more precise state estimates, and in general the MSPFb has lower Monte Carlo variation in the reported log-likelihood function. |
| Keywords: | Multivariate Stirling interpolation, Particle filtering, Non-linear DSGE models, Non-normal shocks, Quasi-maximum likelihood |
| JEL: | C13 C15 E10 E32 |
| Date: | 2008–06–20 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2008-33&r=dge |
| By: | Malin Adolfson; Stefan Laseen; Jesper Linde; Lars E.O. Svensson |
| Abstract: | We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports that the model may be regarded as structural in a stable low inflation environment. Past policy of the Riksbank until 2007:3 (the end of the sample used) is better explained as following a simple instrument rule than as optimal policy under commitment. We show and discuss the differences between policy projections for the estimated instrument rule and for optimal policy under commitment, under alternative definitions of the output gap, different initial values of the Lagrange multipliers representing policy in a timeless perspective, and different weights in the central-bank loss function. |
| JEL: | E52 E58 F41 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14092&r=dge |
| By: | Ricardo Lagos; Guillaume Rocheteau; Pierre-Olivier Weill |
| Abstract: | We study the dynamics of liquidity provision by dealers during an asset market crash, described as a temporary negative shock to investors aggregate asset demand. We consider a class of dynamic market settings where dealers can trade continuously with each other, while trading between dealers and investors is subject to delays and involves bargaining. We derive conditions on fundamentals, such as preferences, market structure and the characteristics of the market crash (e.g., severity, persistence) under which dealers provide liquidity to investors following the crash. We also characterize the conditions under which dealers incentives to provide liquidity are consistent with market efficiency. |
| JEL: | C78 D83 E44 G1 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14119&r=dge |