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on Dynamic General Equilibrium |
| By: | Stefano Eusepi; Bruce Preston |
| Abstract: | This paper develops a theory of expectations-driven business cycles based on learning. Agents have incomplete knowledge about how market prices are determined and shifts in expectations of future prices affect dynamics. In a real business cycle model, the theoretical framework amplifies and propagates technology shocks. Improved correspondence with data arises from dynamics in beliefs being themselves persistent and because they generate strong intertemporal substitution effects in consumption and leisure. Output volatility is comparable with a rational expectations analysis with a standard deviation of technology shock that is 20 percent smaller, and has substantially more volatility in investment and hours. Persistence in these series is captured, unlike in standard models. Inherited from real business cycle theory, the benchmark model suffers a comovement problem between consumption, hours, output and investment. An augmented model that is consistent with expectations-driven business cycles, in the sense of Beaudry and Portier (2006), resolves these counterfactual predictions. |
| JEL: | D83 D84 E32 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14181&r=dge |
| By: | Stefano Eusepi; Bruce Preston |
| Abstract: | This paper develops a theory of expectations-driven business cycles based on learning. Agents have incomplete knowledge about how market prices are determined and shifts in expectations of future prices affect dynamics. In a real business cycle model, the theoretical framework amplifies and propagates technology shocks. Improved correspondence with data arises from dynamics in beliefs being themselves persistent and because they generate strong intertemporal substitution effects in consumption and leisure. Output volatility is comparable with a rational expectations analysis with a standard deviation of technology shock that is 20 percent smaller, and has substantially more volatility in investment and hours. Persistence in these series is captured, unlike in standard models. Inherited from real business cycle theory, the benchmark model suffers a comovement problem between consumption, hours, output and investment. An augmented model that is consistent with expectations-driven business cycles, in the sense of Beaudry and Portier (2006), resolves these counterfactual predictions. |
| JEL: | E32 D83 D84 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-20&r=dge |
| By: | Nguyen Manh Hung (Département économique, Université Laval, Cité Universitaire, Ste Foy, Québec, Canada G1K 7P4); Nguyen Van Quyen (Département de science économique, Université d'Ottawa, 55 Laurier E, Ottawa, Ontario, Canada, K1N) |
| Abstract: | The paper presents a synthesis of the economics of exhaustible resources and that of endogenous fertility in an overlapping-generations model. Renewable energy is produced by a backstop, while the consumption good is produced from energy – provided by the backstop or from a stock of fossil fuels – and labor. Along the equilibrium path, we show that the stock of fossil fuels might or might not have been completely depleted. Under the first possibility, the forward-looking competitive equilibrium can be computed recursively from the steady state of the economy. This is however no longer possible under the second possibility where the part of the resource stock left in situ serves as the oil bubble. In this case, long run equilibrium indeterminacy arises with a continuum of possible steady states. Also, the dynamic convergence to a steady state is far from being simply monotone, and might exhibit cyclical behavior, such as damped oscillation, limit cycles, etc. |
| Keywords: | Exhaustible Resources, Endogenous Fertility, Overlapping Generations, Complex Dynamics |
| JEL: | J13 O41 Q30 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dpc:wpaper:1608&r=dge |
| By: | Caliendo, Frank N.; Gahramanov, Emin |
| Abstract: | We study the optimal size of a pay-as-you-go social security program for an economy composed of both permanent-income and hand-to-mouth consumers. While previous work on this topic is framed within a two-period partial equilibrium setup, we study this issue in a life-cycle general equilibrium model. Because this type of welfare analysis depends critically on unobservable preference parameters, we methodically consider all parameterizations of the unobservables that are both feasible and reasonable- all parameterizations that can mimic key features of macro data (feasible) while still being consistent with micro evidence and convention (reasonable). The baseline model predicts that the optimal tax rate is between 6 percent and 15 percent of wage income. |
| JEL: | E62 D50 E21 |
| Date: | 2008–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9553&r=dge |
| By: | Tebaldi, Edinaldo; Elmslie, Bruce |
| Abstract: | This article contributes to the growth literature by developing a formal growth model that provides the basis for studying institutions and technological innovation and examining how human capital and institutional constraints affect the transitional and steady state growth rates of output. The model developed in this article shows that the reason that growth models a-la-Romer (1990) generate endogenous growth is the use of a set of restrictive and unrealistic assumptions regarding the role of institutions in the economy. The baseline model developed in this article shows that the long-run growth of the economy is intrinsically linked to institutions and suggests that an economy with institutions that retard or prevent the utilization of newly invented inputs will experience low levels and low growth rates of output. The model also predicts that countries with institutional barriers that prevent or restrict the adoption of newly invented technologies will allocate a relative small share of human capital in the R&D sector. Moreover, both the baseline and the extended version of the model suggest that sustainable growth in human capital, not an increase in the stock of human capital, generates a growth effect. |
| Keywords: | Institutions; innovation; human capital; economic growth |
| JEL: | O43 O3 |
| Date: | 2008–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9683&r=dge |
| By: | Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Svensson, Lars E O |
| 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. |
| Keywords: | Instrument rules; Open-economy DSGE models; Optimal monetary policy; Optimal policy projections |
| JEL: | E52 E58 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6907&r=dge |
| By: | Maher Khaznaji; Louis Phaneuf |
| Abstract: | We develop and estimate a dynamic stochastic general equilibrium model that features sticky prices, a variable elasticity of demand facing firms and firm-specific labor. While reconciling to a good extent the micro and macro evidence on the behavior of prices, the model offers an accurate account of the dramatic increase in macroeconomic stability from the Great Inflation (1948:1-1979:II) to the Great Moderation (1984:I-2006:II). Reminiscent of the evidence in Shapiro and Watson (1988), the paper shows that labor-supply shocks are the key source of the reduction in the volatility of output growth, followed by investment-specific shocks. However, changes in the behavior of the private sector, a less accommodative monetary policy and smaller shocks explain almost evenly the large decline of the variability in inflation. |
| Keywords: | Great moderation, firm-specific labor, variable demand elasticity, nominal price rigidity |
| JEL: | E31 E32 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0812&r=dge |
| By: | Niola Amendola (Faculty of Economics, University of Rome "Tor Vergata") |
| Abstract: | According to Engineer and Shi (1998, 2001) and Berentsen and Rocheteau (2003), the double coincidence of wants problem seems to be not essential to rationalize the use of money in a search theoretic framework. This paper analyzes an endogenous price search model of money where there is universal double coincidence of wants. The existence of a monetary equilibrium depends, essentially, on the asymmetry in the role played by economic agents in the exchange and production processes. In particular, entrepreneurs are assumed to produce a fixed amount of a divisible consumption good by means of labour services provided by workers. Entrepreneurs can offer a co-operative (barter) contract or a monetary contract to workers. Under the co-operative contract real wages are determined in the labour exchange sector, while in the monetary regime real wages are determined in the commodity exchange sector. The monetary contract is proved to be an equilibrium strategy provided that: (i) the workers' labour disutility is sufficiently high and/or (ii) the entrepreneurs' bargaining power in the commodity market is sufficiently large relative to their bargaining power in the labour market. The rationale for money comes from the fact that entrepreneurs use it as an instrument to maximize their output share. |
| Keywords: | Money, Search, Double Coincidence, Bargaining |
| JEL: | D E |
| Date: | 2008–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:126&r=dge |
| By: | Leonid Kogan; Dmitry Livdan; Amir Yaron |
| Abstract: | We document a new stylized fact regarding the term-structure of futures volatility. We show that the relationship between the volatility of futures prices and the slope of the term structure of prices is non-monotone and has a "V-shape". This aspect of the data cannot be generated by basic models that emphasize storage while this fact is consistent with models that emphasize investment constraints or, more generally, time-varying supply-elasticity. We develop an equilibrium model in which futures prices are determined endogenously in a production economy in which investment is both irreversible and is capacity constrained. Investment constraints affect firms' investment decisions, which in turn determine the dynamic properties of their output and consequently imply that the supply-elasticity of the commodity changes over time. Since demand shocks must be absorbed either by changes in prices, or by changes in supply, time-varying supply-elasticity results in time-varying volatility of futures prices. Estimating this model, we show it is quantitatively consistent with the aforementioned "V-shape" relationship between the volatility of futures prices and the slope of the term-structure. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:mee:wpaper:0803&r=dge |
| By: | Joppe de Ree; Rob Alessie |
| Abstract: | This paper estimates a model of female time allocation and non-durable consumption in an intertemporal utility maximization framework. We are using rather extensive but relatively unexploited series of repeated cross sections from the Dutch B.O. consumer expenditure survey from Statistics Netherlands (1978-2000). As male labor supply is known to respond rather inelastically to wage changes - perhaps due to restrictions on the labor market - we condition on male labor supply in the analysis. We specify assumptions on domestic production technology that allows us to estimate labor supply elasticities that are consistent with non-separable preferences over consumption, leisure and a non-marketable domestically produced good, without the explicit use of time-use data. We find that when intertemporal re-allocation of resources is taken into account female labor supply elasticities increase about 50% in size relative to what we find in a static framework (1.1 to about 1.7). Furthermore, we identify parameters of intertemporal allocation on a log linearized Euler equation using a synthetic panel with a large T dimension. The intertemporal allocation parameter is of reasonable size, but is imprecisely estimated. Moreover, we find that current income is a significant predictor for consumption growth (conditional on demographics). This could be interpreted as evidence against the validity of our version of the life cycle model. We do however offer a number of different explanations for this finding. |
| Keywords: | Life Cycle models, female labor supply, synthetic panel data, Euler equation |
| JEL: | D91 J22 C23 C24 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0817&r=dge |
| By: | Jean-Pierre Danthine (Swiss Finance Institute, University of Lausanne and CEPR); John B. Donaldson (Columbia University) |
| Abstract: | We reexamine the issue of executive compensation within a gen- eral equilibrium production context. Intertemporal optimality places strong restrictions on the form of a representative manager's compen- sation contract, restrictions that appear to be incompatible with the fact that the bulk of many high-proffile 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: | corporate governance, optimal contracting, business cycles |
| JEL: | E32 E44 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp0813&r=dge |
| By: | Thabo Mokoena (South African Reserve Bank, Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria) |
| Abstract: | This paper presents a comprehensive literature review of the theoretical and empirical developments that have taken place over the last two decades in an attempt to address the exchange rate puzzles. Specifically, we discuss non-linear and Bayesian econometric techniques, Dynamic General Equilibrium models, and the Market Microstructure approach that has been designed to address three exchange rate puzzles, namely, the Purchasing Power Parity (PPP) puzzle, the exchange rate disconnect puzzle and the exchange rate determination puzzle. We conclude that the exchange rate puzzles are likely to be less puzzling, if researchers decide to move to non-linear econometric frameworks and microfounded general equilibrium models. |
| Keywords: | Dynamic General Equilibrium Models, Exchange Rate Puzzles, Non-Linear and Bayesian Econometric Models |
| JEL: | C1 C4 F3 F4 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200827&r=dge |