nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒07‒20
nineteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Computation of Equilibria in OLGModels with Many Heterogeneous Households By Sebastian Rausch; Thomas F. Rutherford
  2. On the amplification role of collateral constraints By Mendicino, Caterina
  3. Long-Term Growth and Short-Term Volatility: The Labour Market Nexus By Barbara Annicchiarico; Luisa Corrado; Alessandra Pelloni
  4. Federalism, Education-Related Public Good and Growth when Agents are Heterogeneou By Floriana Cerniglia; Riccarda Longaretti
  5. Private and public consumption and counter-cyclical fiscal policy By Marattin, Luigi
  6. Human capital investment and growth: A dynamic education model By Ben Mimoun, Mohamed; Raies, Asma
  7. Is Volatility Good for Growth? Evidence from the G7 By Elena Andreou; Alessandra Pelloni; Marianne Sensier
  9. Liquidity and Asset Prices By Raphael A. Espinoza; Dimitrios P. Tsomocos
  10. Countercyclical Taxation and Price Dispersion By Eric Mayer; Oliver Grimm
  11. The Spirit of Capitalism, Stock Market Bubbles, and Output Fluctuations By Takashi Kamihigashi
  12. Population growth and natural resource scarcity: long-run development under seemingly unfavourable conditions By Lucas Bretschger
  13. Environmental Concern and Rational Production, Consumption and Rehabilitation By Levy, Amnon
  14. Lump-Sum Taxes in a R&D Model By Xin Long; Alessandra Pelloni; Robert Waldmann
  15. Life-Cycle Portfolio Choice: The Role of Heterogeneity and Under-diversification By Claudio Campanale
  16. The dynamics of knowledge diversity and economic growth By Berliant, Marcus; Fujita, Masahisa
  17. Ramsey with Environmental Awareness By Levy, Amnon
  18. The Optimal Choice of a Monetary Policy Instrument By Andrew Atkeson; Vyjayanthi Chari; Patrick Kehoe
  19. An Approximate Consumption Function By Mario Padula

  1. By: Sebastian Rausch (Department of Economics, University of Duisburg-Essen, Germany; Ruhr Graduate School in Economics, Essen, Germany); Thomas F. Rutherford (The Swiss Federal Institute of Technology (ETH-Zürich), Switzerland)
    Abstract: This paper develops a decomposition algorithm by which a market economy with many households may be solved through the computation of equilibria for a sequence of representative agent economies. The paper examines local and global convergence properties of the sequential recalibration (SR) algorithm. SR is then demonstrated to efficiently solve Auerbach- Kotlikoff OLG models with a large number of heterogeneous households. We approximate equilibria in OLG models by solving a sequence of related Ramsey optimal growth problems. This approach can provide improvements in both efficiency and robustness as compared with simultaneous solution methods.
    Keywords: Computable general equilibrium, Overlapping generations, Microsimulation, Sequential recalibration
    JEL: C68 C81 D61 D91
    Date: 2008–06
  2. By: Mendicino, Caterina
    Abstract: Following the seminal contribution of Kiyotaki and Moore (1997), the role of collateral constraints for business cycle fluctuations has been highlighted by several authors and collateralized debt is becoming a popular feature of business cycle models. In contrast, Kocherlakota (2000) and Cordoba and Ripoll (2004) demonstrate that collateral constraints per se are unable to propagate and amplify exogenous shocks, unless unorthodox assumptions on preferences and production technologies are made. The aim of this paper is to examine the contribution of costly debt enforcement procedures in the amplification of business cycle fluctuations through collateral constraints. We show that for realistic degrees of inefficiency, collateral constraints can significantly amplify the effects of productivity shocks on output even under standard assumptions on preferences and technology.
    Keywords: business cycle; debt enforcement procedures; credit frictions.
    JEL: E32 E30 E21
    Date: 2008–01
  3. By: Barbara Annicchiarico; Luisa Corrado; Alessandra 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 findings are somehow consistent with the existing empirical evidence: data show, in fact, a somewhat ambiguous relationship between output growth and real variability, but a generally negative relationship between output growth and nominal variability.
    Keywords: Growth; Volatility; Monetary and Real Shocks; Labour Supply Elasticity; Second-Order Approximation Methods.
    JEL: O42 E30 C63
    Date: 2008–07
  4. By: Floriana Cerniglia; Riccarda Longaretti
    Abstract: In this paper we use an endogeneous-growth model with human capital and heterogeneous agents to analyse the relationship between fiscal federalism and economic growth. Results show that federalism, which allows education-related public good levels to be tailored on the human capital of heterogeneous agents, increases human capital accumulation. This in turn leads to higher rates of growth. The benefits of federalism are stronger the larger the intra-jurisdiction variance of agents’ human capital.
    Keywords: Fiscal Federalism, Endogenous Economic Growth, Overlapping Generations, Heterogeneous Agents
    JEL: H77 J24 O41
    Date: 2008–05
  5. By: Marattin, Luigi
    Abstract: This paper bulds a closed-economy NK-DSGE model with no capital, in which consumers value both private and public consumption and fiscal policy is determined by a feedback rule responding to output gap. We analyse how different degrees of substitutatibility/complementarity between private and public consumption and a pro/counter-cyclical stance of fiscal policy affect equilbrium determinacy and the response of the economy to a wide range of shocks. Results show that determinacy is ensured by counter-cyclical fiscal policy under complementarity; increasing substitutability also pro-cyclical stance becomes stable. Differences can be observed also in response to shocks.
    JEL: E62 H40 E63
    Date: 2007–05
  6. By: Ben Mimoun, Mohamed; Raies, Asma
    Abstract: The paper aims to explicitly determine the distribution of human capital across hierarchic educational stages along the transition process, and to analyse the determinants of its evolution. We apply optimal control principles in a model of endogenous growth with two successive stages of education. We show that with initial relative scarcity of advanced human capital, the duration of studies at the advanced level should increase until reaching its equilibrium level. We also find that, by raising the duration of studies at the advanced schooling level, improvements in the quality of education at this level also enhances the economy’s growth rate, both in the transition and in the long-run.
    Keywords: Human capital investment; growth; a dynamic model
    JEL: J24 H52 O40
    Date: 2008
  7. By: Elena Andreou (University of Cyprus); Alessandra Pelloni (Faculty of Economics, University of Rome "Tor Vergata"); Marianne Sensier (University of Manchester)
    Abstract: We provide empirical support for a DSGE model with nominal wage stickiness where growth is driven by learning-by-doing and money shocks and their variance are allowed to impact on long-run output growth. In our theoretical model the variance of monetary shocks has a negative effect on growth, while output volatility is good for growth as a positive relationship exists. Utilising a bivariate GARCH-M model we test the empirical conditional mean and variance relationships of nominal money and production growth rates in the G7 countries. We corroborate the theoretical model predictions with evidence from Bonferroni multiple tests across the G7.
    Keywords: growth uncertainty, learning-by-doing, monetary uncertainty, multivariate GARCH-in-mean, nominal rigidity.
    JEL: C32 E32 O42
    Date: 2008–07–14
  8. By: Rochelle M. Edge; Thomas Laubach; John C. Williams
    Abstract: This paper examines welfare-maximizing monetary policy in an estimated micro-founded general equilibrium model of the U.S. economy where the policymaker faces uncertainty about model parameters. Uncertainty about parameters describing preferences and technology implies uncertainty about the model’s dynamics, utility-based welfare criterion, and the “natural” rates of output and interest that would prevail absent nominal rigidities. We estimate the degree of uncertainty regarding natural rates due to parameter uncertainty. We find that optimal Taylor rules under parameter uncertainty respond less to the output gap and more to price inflation than would be optimal absent parameter uncertainty. We also show that policy rules that focus solely on stabilizing wages and prices yield welfare outcomes very close to the first-best.
    JEL: E5
    Date: 3008–05
  9. By: Raphael A. Espinoza; Dimitrios P. Tsomocos
    Abstract: We show in an exchange economy with liquidity constraints that the volume of trade and asset prices depend on both the supply of liquidity by the Central Bank and on the liquidity of assets and commodities. As a result, monetary aggregates are informative for the assessment of economic developments and the conduct of monetary policy. We also show that the positive correlation between state prices and the future spot rate generates a risk-premium in the term structure of interest rates, even in absence of aggregate uncertainty. These results do not obtain in representative agent models but hold in any monetary economy with heterogeneous agents and short-term liquidity effects, where monetary costs act as transaction costs and the quantity theory of money is verified.
    Keywords: liquidity; cash-in-advance constraints; term structure of interest rates
    JEL: E43 G12
    Date: 2008
  10. By: Eric Mayer (University of Würzburg, Department of Economics, Würzburg, Germany); Oliver Grimm (Center of Economic Research at ETH Zurich)
    Abstract: In this paper, we explore the benefits from a supply-side oriented fiscal tax policy within the framework of a New Keynesian DSGE model. We show that countercyclical tax rules, which are contingent on the observed welfare gap or alternatively on the markup shock and levied on value added, reduce remarkably the inverse impact of cost push shocks. We state that the tax rule establishes a path for the evolution of marginal cost at the firm level that largely prevents built up of price dispersion. We highlight that this tax policy is also effective under a balancedbudget regime. Hence, fiscal policy can disencumber monetary policy in the light of cost push shocks.
    Keywords: Countercyclical fiscal policy, welfare costs, nominal rigidities
    JEL: E32 E61 E62
    Date: 2008–06
  11. By: Takashi Kamihigashi (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: This paper presents a representative agent model in which stock market bubbles cause output fluctuations. Assuming that utility depends directly on wealth, we show that stock market bubbles arise if the marginal utility of wealth does not decline to zero as wealth goes to infinity. Bubbles may affect output positively or negative depending on whether the production function exhibits increasing or decreasing returns to scale. In sunspot equilibria, the bursting of a bubble is followed by a sharp decline in output one period later. Various numerical examples are given to illustrate the behavior of stochastic bubbles and the relationship between bubbles and output.
    Keywords: Spirit of capitalism, stock market bubbles, output fluctuations, wealth in utility, sunspot equilibria
    JEL: E20 E32
    Date: 2007–07
  12. By: Lucas Bretschger (CER-ETH - Center of Economic Research at ETH Zurich)
    Abstract: The paper develops a model with non-exponential population growth, nonrenewable natural resources, and endogenous knowledge creation to analyse substitution between primary inputs and an essential use of resources in the innovation sectors, which is generally considered as most unfavourable for growth. We show that population growth and poor input substitution are not detrimental but even needed to obtain sustainable consumption. A permanent increase in living standards can be achieved under free market conditions. With a backstop technology, the system converges to a balanced growth path with classical properties.
    Keywords: Population growth, non-renewable resources, poor input substitution, technical change, sustainability
    JEL: Q32 Q55 Q56 O41
    Date: 2008–06
  13. By: Levy, Amnon (University of Wollongong)
    Abstract: Utility from consumption might be spoiled by the degradation of the environment. The incorporation of a direct dependency of utility on the state of the environment through environmental concern and the incorporation of the effects of production pollution and rehabilitative investment on the environment into a lifetime utility maximization model imply that a minimal degree of impatience is necessary for an interior steady state to exist. This steady state is unique, approachable along a path with damped oscillations of consumption and rehabilitative investment, and characterized by a larger production than in the steady state without environmental concern.
    Keywords: Consumption, environmental investment, golden rule
    JEL: O12 Q56
    Date: 2008
  14. By: Xin Long (Faculty of Economics, University of Rome "Tor Vergata"); Alessandra Pelloni (Faculty of Economics, University of Rome "Tor Vergata"); Robert Waldmann (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: Is it possible to increase growth and welfare by raising taxes and disposing of the tax revenues? We show this may indeed be the case in a simple model with endogenous technical change, represented by an increase in the variety of intermediate goods.
    Date: 2008–07–14
  15. By: Claudio Campanale (Universidad de Alicante)
    Abstract: The empirical work on household portfolio choice documents two facts. One, the stock market participation rate is low and hump-shaped over the life-cycle, two, the conditional share of stocks is also low but does not appear to change much during the life-cycle. In contrast the standard life-cycle portfolio choice model predicts high and monotonically increasing participation rates and conditional stock shares that are low and exhibit dramatic changes with age. In this paper I consider a number of extensions to this basic framework. I find that a small per period participation cost is needed to generate a hump shaped life-cycle profile of participation rates. Under a realistic calibration the quantitative effect is minor. Progressive social security and the assumption that the risk of stock portfolios is declining in household wealth as a consequence of better diversification opportunities 'an assumption that has some empirical support' though provide substantial amplification and significantly improve the ability of the model to match the data. Under-diversification also reduces the average portfolio share of stocks conditional on participation and, together with the intergenerational transmission of wealth makes it insensitive to age, consistent with the empirical evidence.
    Keywords: Portfolio choice, life-cycle, bequests, diversification, social security.
    Date: 2008–03
  16. By: Berliant, Marcus; Fujita, Masahisa
    Abstract: How is long run economic growth related to the diversity of knowledge? We formulate and study a microeconomic model of knowledge creation, through the interactions among a group of heterogeneous R & D workers, embedded in a growth model to address this question. Income to these workers accrues as patent income, whereas transmission of newly created knowledge to all such workers occurs due to public transmission of patent information. The model features myopic R & D workers in a pure externality model of interaction. Surprisingly, in the general case for a large set of initial conditions we find that the equilibrium process of knowledge creation converges to the most productive state, where the population splits into smaller groups of optimal size; close interaction takes place within each group only. Equilibrium paths are found analytically. Long run economic growth is positively related to both the effectiveness of pairwise R & D worker interaction and to the effectiveness of public knowledge transmission.
    Keywords: knowledge creation; knowledge externalities; microfoundations of endogenous growth; knowledge diversity and growth
    JEL: D90 D83 O31
    Date: 2008–07–09
  17. By: Levy, Amnon (University of Wollongong)
    Abstract: This paper speculates how Ramsey’s (1928) model of optimal consumption and saving would have been constructed had Sir Frank Ramsey lived in a period of greater awareness of the environmental damaged caused by production processes. The paper extends Ramsey’s model to the case where the instantaneous satisfaction of the representative agent from consumption is spoiled by the degradation of his physical environment and spending on cleaning up and greening operations are therefore engendered.
    Keywords: Consumption, environmental investment, golden rule
    JEL: O12 Q56
    Date: 2008
  18. By: Andrew Atkeson; Vyjayanthi Chari; Patrick Kehoe
    Abstract: Monetary policy instruments di¤er in tightness. how closely they are linked to in.a- tion. and transparency. how easily they can be monitored. Tightness is always desirable, while transparency is desirable only if policymakers cannot commit to future policies. We show that because interest rates can be made endogenously tight they have a natural advantage over both money growth and exchange rates. We also show that interest rates and exchange rates, because they are prices, are more transparent than money growth and thus have a natural advantage over money growth. Our model provides some insights into why developed economies tend to use inter- est rates as their primary policy instrument and why less-developed economies, in which interest rates are not available as an instrument, tend to use exchange rates.
    Date: 2007–11
  19. By: Mario Padula (Università di Venezia, and CSEF)
    Abstract: This paper proposes an approximation to the consumption function in the buffer-stock model. The approximation is based on the analytic properties of the consumption function in the buffer-stock model. In such model, the consumption function is increasing and concave and its derivative is bounded from above and below. We compare the approximation with the consumption function obtained using the endogenous grid point algorithm and show that using the former or the latter for estimating the Euler equation leads to very similar results.
    Keywords: Buffer stock model of saving; Computational methods; Approximation methods and estimation
    JEL: C63 D12 E21
    Date: 2008–07–01

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