nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒07‒05
seventeen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Openness, Bureaucratic Corruption and Public Policy in an Endogenous Growth Model By Rangan Gupta; Emmanuel Ziramba
  2. Money and Nominal Bonds By Marchesiani, Alessandro; Senesi, Pietro
  3. Schumpeterian Foundations of Real Business Cycles By Nuno Barrau, Galo
  4. Costly Tax Enforcement and Financial Repression: A Reconsideration Using an Endogenous Growth Model By Rangan Gupta; Emmanuel Ziramba
  5. Technology and non-technology shocks in a two-sector economy. By Francesco Busato; Alessandro Girardi; Amedeo Argentiero
  6. The Bahaviour of the Saving Rate in the Neoclassical Optimal Growth Model By Anastastia Litina; Theodore Palivos
  7. Misalignment in the Growth-Maximizing Tax Rate under Alternative Assumptions of Tax Evasion By Rangan Gupta; Emmanuel Ziramba
  8. Endogenous Job Destruction and Job Matching in Cities By Zenou, Yves
  9. Costly Tax Enforcement and Financial Repression By Rangan Gupta; Emmanuel Ziramba
  10. The Inconsistency Puzzle Resolved: an Omitted Variable By Arefiev, Nikolay
  11. On the job search in a matching model with heterogeneous jobs and workers By Juan J. Dolado; Marcel Jansen; Juan F. Jimeno
  12. Employment Protection Reform in Search Economies By Olivier L'Haridon; Franck Malherbet
  13. Age, Luck, and Inheritance By Jess Benhabib; Shenghao Zhu
  14. Models of Idea Flows By Fernando E. Alvarez; Francisco J. Buera; Robert E. Lucas, Jr.
  15. Ideas and Growth By Robert E. Lucas, Jr.
  16. Executive Compensation and Stock Options: An Inconvenient Truth By Danthine, Jean-Pierre; Donaldson, John B
  17. Persistent Real Exchange Rates By Alok Johri; Amartya Lahiri

  1. By: Rangan Gupta (Department of Economics, University of Pretoria); Emmanuel Ziramba (Department of Economics, University of South Africa)
    Abstract: In this paper, we develop a dynamic general equilibrium overlapping generations monetary endogenous growth model of a financially repressed small open economy characterized by bureaucratic corruption, and, in turn, analyze optimal policy decisions of the government following an increase in the degree of corruption. Unlike as suggested in the empirical literature, we find that increases in the degree of corruption should ideally result in a fall in seigniorage, as an optimal response of the benevolent government. In addition, higher degrees of corruption should also be accompanied with lower levels of financial repression.
    Keywords: Bureaucratic Corruption, Macroeconomic Policy, Openness
    JEL: D73 E63 F43
    Date: 2008–06
  2. By: Marchesiani, Alessandro; Senesi, Pietro
    Abstract: This paper studies an economy with trading frictions, ex post heterogeneity and nominal bonds in a model à la Lagos and Wright (2005). It is shown that a strictly positive interest rate is a sufficient condition for the allocation with nominal bonds to be welfare improving. This result comes from the protection against the inflation tax.
    Keywords: money; search; nominal bonds and taxation
    JEL: H20 E40 H63
    Date: 2007–11–22
  3. By: Nuno Barrau, Galo
    Abstract: In this paper I propose a dynamic stochastic general quilibrium model that includes many of Schumpeter’s ideas about growth and business cycles. In this model, technology advances are due to the introduction of vertical innovations by entrepreneurs who are funded by banks. The model is solved and estimated by bayesian methods for the U.S. economy to compute the value of some of its structural parameters. Results show that the presented innovation mechanism is roughly equivalent in terms of volatilies, correlations and impulse responses to the technology shocks in real business cycle models. Notwithstanding, the model differs from traditional RBC models as it incorporates technology catch-up features that affect the convergence to the steady-state.
    JEL: E27 C50 O40
    Date: 2008–06–20
  4. By: Rangan Gupta (Department of Economics, University of Pretoria); Emmanuel Ziramba (Department of Economics, University of South Africa)
    Abstract: Using a monetary endogenous growth overlapping generations model characterized by financial repression, purposeful government expenditures and costly tax enforcement, we analyze whether financial repression can be explained by the cost involved in raising taxes. Note financial repression is modeled via ``high" obligatory reserve requirements that banks in the economy need to hold. We show that higher costs of tax collection produces a monotonic increase in reserve requirements. Moreover, the government tends to rely more on indirect taxation, compared to direct taxation, as costs of tax collection increases.
    Keywords: Costly tax Enforcement, Financial Repression, Endogenous Growth, Overlapping Generations Model
    JEL: E62 H21 O41
    Date: 2008–06
  5. By: Francesco Busato (University of Naples Parthenope and University of Aarhus, School of Economics and Managements); Alessandro Girardi (ISAE - Institute for Studies and Economic Analyses and University of Rome Tor Vergata); Amedeo Argentiero (University of Rome Tor Vergata)
    Abstract: This paper presents an empirically testable two-sector dynamic general equilibrium model for the United States economy that admits technology and non-technology shocks. Long-run identification restrictions further distinguish the impact of each shocks over the originating sector (i.e. as a sector-specific shock), and over other sectors different from the originating one (i.e. as a crosssector shock), also exploring the shocks transmission mechanism across sectors. There are three main results. First, business cycles are mainly generated, in each sector, by technology shocks (primarily described by sector-specific shocks), but they are transmitted across sectors along the sectors’ demand side, i.e. passing through non-technology shocks. Second, technology and nontechnology shocks almost equally share the responsibility of fluctuations in the aggregate manufacturing sector. Third, the aggregate dynamics is driven by the relatively larger sector which is the non-durable good one.
    Keywords: Long-run restrictions, sector-specific shocks, cross sector shocks, real business cycle, United States economy.
    JEL: E2 E3 E32
    Date: 2008–04
  6. By: Anastastia Litina (Department of Economics, University of Macedonia); Theodore Palivos (Department of Economics, University of Macedonia)
    Abstract: This paper characterizes analytically the saving rate in the Ramsey-Cass-Koopmans model with a general production function when there exists both exogenous and endogenous growth. It points out conditions involving the share of capital and the elasticities of factor and intertemporal substitution under which the saving rate path to its steady-state value exhibits overshooting, undershooting, or is monotonic. Simulations illustrate these interesting dynamics. The paper also identifies the general class of production functions that render the saving rate constant along the entire transition path and hence make the Ramsey-Cass-Koopmans model isomorphic to that of Solow-Swan.
    Keywords: The Ramsey-Cass-Koopmans model; Saving rate; Elasticities of Substitution
    JEL: E20 O41 O10
    Date: 2008–06
  7. By: Rangan Gupta (Department of Economics, University of Pretoria); Emmanuel Ziramba (Department of Economics, University of South Africa)
    Abstract: Using a general equilibrium endogenous growth model based on an overlapping generations framework, and characterized by tax evasion and productive public expenditure, we analyze the relationship between growth-maximizing tax rates and alternative assumptions about the nature of tax evasion. We show that if the government treats tax evasion as exogenous, when it is determined endogenously, it ends up choosing a growth-maximizing tax rate that is higher than it should ideally be. The paper, thus, highlights a possible misalignment in the growth-maximizing tax rate in the event of a failure on part of the government to realize the behavioral nature of tax evasion.
    Keywords: Endogenous Growth, Optimal Tax Rate, Overlapping Generations Model, Tax Evasion
    JEL: E6 E62 E26
    Date: 2008–06
  8. By: Zenou, Yves (Research Institute of Industrial Economics (IFN))
    Abstract: We propose a spatial search-matching model where both job creation and job destruction are endogenous. Workers are ex ante identical but not ex post since their job can be hit by a technological shock, which decreases their productivity. They reside in a city and commuting to the job center involves both pecuniary and time costs. Thus, workers with high wages are willing to live closer to jobs to save on time commuting costs. We show that, in equilibrium, there is a one-to-one correspondence between the productivity space and the urban location space. Workers with high productivities and wages reside close to jobs, have low commuting costs and pay high land rents. We also show that higher commuting costs and higher unemployment benefits lead to more job destruction.
    Keywords: Job Search; Commuting Costs; Wage Distribution; Urban Land Use
    JEL: D83 J41 J64 R14
    Date: 2008–06–19
  9. By: Rangan Gupta (Department of Economics, University of Pretoria); Emmanuel Ziramba (Department of Economics, University of South Africa)
    Abstract: Using a simple pure-exchange overlapping generations model characterized by financial repression, purposeful government expenditures and cost of tax collection, we analyze whether financial repression can be explained by the cost of raising taxes. Note, following the trend in the current literature, financial repression has been modeled via obligatory reserve requirements that banks in the economy need to hold. We show that with public expenditures affecting utility of the agents, modest costs of tax collection tend to result in financial repression being pursued as an optimal policy by the consolidated government. However, when public expenditures are purposeless, the above result only holds for relatively higher costs of tax collection. But, more importantly, costs of tax collection cannot produce a monotonic increase in the reserve requirements, what are critical, in this regard, are the weights the consumer assigns to the public good in the utility function and the size of the government. So cost of tax enforcement is necessary but not a sufficient condition for producing financial repression as a welfare optimizing outcome.
    Keywords: Pure Exchange Overlapping Generations Model, Costly Tax Enforcement, Financial Repression
    JEL: E62 H21 O41
    Date: 2008–06
  10. By: Arefiev, Nikolay
    Abstract: We find that the contemporary version of the dynamic Ramsey problem omits one important variable that we take into consideration in this paper. The effect of introducing of this variable into the analysis of dynamic inconsistency is similar to that of introducing expected inflation into the Phillips curve: we show that only a policy surprise affects the attainable resource allocation set and the optimal policy. In contrast to Chamley (1986), we show that intensive capital income taxation at the beginning of optimal policy does not imply a lump-sum taxation of household wealth and cannot reduce the excess tax burden. We also demonstrate that the Ramsey policy is dynamically consistent even without commitment. We resolve the Ramsey problem and compare our results to those of Chamley on optimal capital income taxation.
    Keywords: Inconsistency; Equilibrium policy; Optimal taxation
    JEL: E62 H21 E61
    Date: 2008
  11. By: Juan J. Dolado (Universidad Carlos III de Madrid); Marcel Jansen (Universidad Carlos III de Madrid); Juan F. Jimeno (Banco de España)
    Abstract: This paper examines the effects of transitory skill mismatch in a matching model with heterogeneous jobs and workers. In our model, some high-educated workers may accept unskilled jobs for which they are over-qualified but are allowed to engage in on-the-job search in pursuit of a better job. We show that this feature has relevant implications for the set of potential equilibria, the unemployment rates of the different types of workers, the degree of wage inequality, and the response of the labour market to shifts in the demand and supply of skills.
    Keywords: on-the-job search, skills, unemployment, wage inequality
    JEL: J1 J24 J41
    Date: 2008–06
  12. By: Olivier L'Haridon (GREG-HEC and University Paris Sorbonne); Franck Malherbet (THEMA - CNRS - Université de Cergy-Pontoise, IZA and fRDB)
    Abstract: The design of employment protection legislation (EPL) is of particular importance in the European debate on the contours of labor market reform. In this article we appeal to an equilibrium unemployment model to investigate the virtues of EPL reform which reduces the red tape and legal costs associated with layoffs and introduces a U.S.-style experience- rating system, which we model as a combination of a layoff tax and a payroll subsidy. The reform considered shows that it is possible to improve the efficiency of employment protection policies without affecting the extent of worker protection on the labor market. These results are consistent with the conventional wisdom that experience rating is desirable, not only as an integral component of unemployment-compensation finance, as most studies acknowledge, but also as part and parcel of a virtuous EPL system.
    Keywords: Search and Matching Models, Employment Protection, State-Contingent Layoff Tax, Experience-Rating
    JEL: J41 J48 J60
    Date: 2008
  13. By: Jess Benhabib; Shenghao Zhu
    Abstract: We present a mechanism to analytically generate a double Pareto distribution of wealth in a continuous time OLG model with optimizing agents who have bequest motives, are subject to stochastic returns on capital and have uncertain lifespans. We disentangle, roughly, the contribution of inheritance, age and stochastic rates of capital return to wealth inequality, in particular to the Gini coefficient. We investigate the role of the fiscal and redistributive policies for wealth inequality and social welfare.
    JEL: E21 E25
    Date: 2008–06
  14. By: Fernando E. Alvarez; Francisco J. Buera; Robert E. Lucas, Jr.
    Abstract: This paper introduces several variations of the Eaton and Kortum (1999) model of technological change and characterizes their long run implications. Both exogenous and endogenous growth examples are studied.
    JEL: O0
    Date: 2008–06
  15. By: Robert E. Lucas, Jr.
    Abstract: This paper introduces and partially develops a new model of endogenous technological change, viewed as the product of a class of problem-solving producers. The model, based on earlier work by Eaton and Kortum, is built up from the premise that all knowledge resides in the head of some individual person and the knowledge of a firm, or economy, or any group of people is simply the knowledge of the individuals that comprise it. The model is applied to an economy with a cohort structure. A calibration the model using cross-section earnings data, in addition to aggregate GDP growth, is considered.
    JEL: O0
    Date: 2008–06
  16. By: Danthine, Jean-Pierre; Donaldson, John B
    Abstract: We reexamine the issue of executive compensation within a general equilibrium production context. Intertemporal optimality places strong restrictions on the form of a representative manager's compensation contract, restrictions that appear to be incompatible with the fact that the bulk of many high-profile managers' compensation is in the form of various options and option-like rewards. We therefore measure the extent to which a convex contract alone can induce the manager to adopt near-optimal investment and hiring decisions. To ask this question is essentially to ask if such contracts can effectively align the stochastic discount factor of the manager with that of the shareholder-workers. We detail exact circumstances under which this alignment is possible and when it is not.
    Keywords: business cycles; convex contracts; corporate governance; executive compensation; optimal contracting; stock options
    JEL: E32 E44
    Date: 2008–06
  17. By: Alok Johri; Amartya Lahiri
    Abstract: Three well known facts that characterize exchange rate data are: (a) the high correlation between bilateral nominal and real exchange rates; (b) the high degree of persistence in real exchange rate movements; and (c) the high volatility of real exchange rates. This paper attempts a joint, albeit partial, rationalization of these facts in an environment with no staggered contracts and where prices are preset for only one quarter. There are two key innovations in the paper. First, we augment a standard two-country open economy model with learning-by-doing in production at the firm level. This induces monopolistically competitive firms to endogeneize the productivity effect of their price setting behavior. Specifically, firms endogenously choose not to adjust prices by the full proportion of a positive monetary shock in order to take advantage of the productivity benefits of higher production. Second, we introduce habits in leisure. This makes the labor supply decision dynamic and adds an additional source of propagation. We show that the calibrated model can quantitatively reproduce significant fractions of the aforementioned facts. Moreover, as in the data, the model also produces a positive correlation between the terms of trade and the nominal exchange rate.
    Keywords: Real exchange rate movements, endogenous price stickiness, learning-by-doing
    JEL: F1 F2
    Date: 2008–06

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