|
on Dynamic General Equilibrium |
| By: | Ippei Fujiwara (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: ippei.fujiwara@boj.or.jp)); Yasuo Hirose (Economist, International Department, Bank of Japan (E-mail: yasuo.hirose@boj.or.jp)); Mototsugu Shintani (Associate Professor, Department of Economics, Vanderbilt University, and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: mototsugu.shintani@vanderbilt.edu, mototsugu.shintani@boj.or.jp)) |
| Abstract: | We examine whether the news shocks, as explored in Beaudry and Portier (2004), can be a major source of aggregate fluctuations. For this purpose, we extend a dynamic stochastic general equilibrium model, a la Christiano, Eichenbaum, and Evans (2005), by allowing news shocks on the total factor productivity and estimate the model using Bayesian methods. Estimation results on the Japanese and U.S. economies show that (1) the news shocks play an important role in business cycles; (2) a news shock with a longer forecast horizon has larger effects on nominal variables; and (3) the overall effect of the total factor productivity on hours worked becomes ambiguous in the presence of news shocks. |
| Keywords: | Demand for Money, Aggregation, Heterogeneity |
| JEL: | E41 C43 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:08-e-16&r=dge |
| By: | Matthew Chambers; Carlos Garriga; Don Schlagenhauf |
| Abstract: | The past decade has brought substantial innovations in the structure of mortgage loans. The objective of this paper is to understand how loan structure (terms of repayment and amortization schedule) affects (i) the borrower's selection of a mortgage contract and (ii) the aggregate economy. We develop a quantitative equilibrium theory of mortgage choice where housing plays the dual role of a consumption and a risky investment good. Households can choose from a menu of long-term mortgage loans that differ in structure. We show that our model accounts for observed patterns in housing consumption, ownership, and asset portfolio allocations. Our model predicts that the loan structure is a quantitatively significant factor in a household's housing finance decision. The model suggests that the mortgage structure preferred by a household is dependent on age and income dependent and that loan products with low initial payments offer an alternative to mortgages with no downpayment. At the macroeconomic level, the model suggests a connection between the loan structure, ownership, and rental markets. In addition, we and evidence that the volume of housing transactions increases when payments increase over time and households have little housing equity. In contrast, we show that loans that allow for a rapid accumulation of home equity can still have positive participation effects without increasing the volatility of housing transactions. |
| Keywords: | Mortgage loans |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-024&r=dge |
| By: | James M. Nason; John H. Rogers |
| Abstract: | Exchange rates have raised the ire of economists for more than twenty years. The problem is that few, if any, exchange rate models are known to systematically beat a naive random walk in out-of-sample forecasts. Engel and West (2005) show that these failures can be explained by the standard present value model (PVM) because it predicts random walk exchange rate dynamics if the discount factor approaches one and fundamentals have a unit root. This paper generalizes the Engel and West hypothesis to the larger class of open economy dynamic stochastic general equilibrium (DSGE) models. The Engel and West hypothesis is shown to hold for a canonical open economy DSGE model. We show that all the predictions of the standard PVM carry over to the DSGE PVM. The DSGE PVM also yields unobserved components (UC) models that we estimate using Bayesian methods and a quarterly Canadian-U.S. sample. Bayesian model evaluation reveals that the data support a UC model that calibrates the discount factor to one, implying the Canadian dollar–U.S. dollar exchange rate is a random walk dominated by permanent cross-country monetary and productivity shocks. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2008-16&r=dge |
| By: | Philippe Michel (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Bertrand Wigniolle (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Ecole d'économie de Paris - Paris School of Economics - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | This article is devoted to the study of the Pareto-efficiency of the competitive equilibrium for a simple overlapping generations economy with endogenous fertility. For CES utility and production functions, it is proved that the economic properties of the economy are closely related to the two elasticities<br />of substitution. First, the competitive equilibrium exists and is unique if the sum of the two elasticities is not smaller than one. Secondly, a set of parameters is provided such that the equilibrium is both in under-accumulation and inefficient. Thirdly, a sufficient condition is proved that ensures that an equilibrium converging in under-accumulation is Pareto-efficient: the sum of the two elasticities must not be greater than two. |
| Keywords: | endogenous fertility ; Pareto-efficiency |
| Date: | 2008–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00306463_v1&r=dge |
| By: | Caterina Mendicino |
| 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 fluctuations and cycles; Credit and credit aggregates |
| JEL: | E20 E3 E32 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-23&r=dge |
| By: | Xavier Pautrel (Nantes Atlantique Université) |
| Abstract: | This article demonstrates that when finite lifetime is introduced in a Lucas (1988) growth model, the environmental policy may enhance growth both in the short- and the long-run, while pollution does not influence educational activities, labor supply is not elastic and human capital does not enter the utility function. This is because finite lifetime and the appearance of newborns at each date creates a turnover of generations which disconnects the aggregate consumption growth to the interest rate. We show that the shorter is the horizon, the greater the effect of the environmental policy on growth, because the higher the “generational turnover effect”. We also demonstrate that when time is not the single production factor in education, the environmental policy promotes growth only if time remains the predominant factor. Otherwise, the crowding-out effect of the tighter environmental policy dominates the “generational turnover effect” and growth diminishes. Finally, when the source of pollution is final output rather than physical capital and time is the single factor in education, the environmental does not affect growth in the steady-state, despite the “generational turnover effect”. Nevertheless, if the education good is introduced, the positive influence of the environmental policy appears again. |
| Keywords: | Growth, Environment, Overlapping generations, Human capital |
| JEL: | C O |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2008.57&r=dge |
| By: | Martin Bodenstein |
| Abstract: | The empirical literature provides a wide range of estimates for trade elasticities at the aggregate level. Furthermore, recent contributions in international macroeconomics suggest that low (implied) values of the trade elasticity of substitution may play an important role in understanding the disconnect between international prices and real variables. However, a standard model of the international business cycle displays multiple locally isolated equilibria if the trade elasticity of substitution is sufficiently low. The main contribution of this paper is to compute and characterize some dynamic properties of these equilibria. While multiple steady states clearly signal equilibrium multiplicity in the dynamic setup, this is not a necessary condition. Solutions based on log-linearization around a deterministic steady state are of limited to no help in computing the true dynamics. However, the log-linear solution can hint at the presence of multiple dynamic equilibria. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:934&r=dge |
| By: | Luciano Greco (University of Padua) |
| Abstract: | In a simple stochastic overlapping generation model, individuals work when young and retire when old, generations’ productivity is affected by a serially uncorrelated random shock, and fiat money and nominal public debt are the only storable assets. In this setting, we show that social security programs featured by a constant contribution rate and budget-balance in each period, as common in the literature, are Pareto-dominated by programs allowing for budget unbalance, compensated by variations of the outstanding nominal public debt. |
| Keywords: | Intergenerational risk sharing, social security, public debt, inflation |
| JEL: | E24 E63 H55 H63 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0083&r=dge |
| By: | Francisco Alvarez-Cuadrado; Ngo Van Long |
| Abstract: | We propose an overlapping generations economy where households care about relative consumption, the difference between their consumption and the consumption of their reference group. An individual's consumption is driven by the comparison of his lifetime income and the lifetime income of his reference group; hence the paper offers a permanent income version of the Duesenberry's relative income hypothesis. Across households the saving ratio increases with income while aggregate saving is independent of the income distribution. Positional concerns lead agents to over-consume, over-work and under-save. We propose a simple tax schedule that induces the competitive economy to achieve the efficient allocation. <P>Nous proposons une économie caractérisée par des générations imbriquées et des ménages qui accordent une importance à la consommation relative, soit la différence entre leur consommation et celle de leur groupe de référence. Les habitudes de consommation d’un individu sont dictées par la comparaison du revenu qu’il gagnera au cours de sa vie avec celui de son groupe de référence. Le document offre ainsi une version de l’hypothèse du revenu relatif avancée par Duesenberry qui tient compte du revenu permanent. Dans l’ensemble des ménages, le ratio d’épargne augmente en fonction du revenu, mais l’épargne globale est indépendante de la répartition du revenu. Les préoccupations des agents concernant leur position incitent ces derniers à consommer et à travailler de façon excessive et à épargner insuffisamment. Nous proposons un programme d’imposition qui encourage l’économie concurrentielle à atteindre une répartition efficiente. |
| Keywords: | relative consumption; relative income hypothesis; permanent income hypothesis, consommation relative, hypothèse du revenu relatif, hypothèse du revenu permanent |
| JEL: | D62 E21 H21 |
| Date: | 2008–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2008s-18&r=dge |
| By: | Andriy Zapechelnyuk (Kyiv School of Economics); Ro'i Zultan (Hebrew University of Jerusalem) |
| Abstract: | The high cost of searching for employers borne by prospective employees increases friction in the labor market and inhibits formation of efficient employer-employee relationships. It is conventionally agreed that mechanisms that reduce the search costs (e.g., internet portals for job search) lower unemployment and improve overall welfare. We demonstrate that a reduction of the search costs may have the converse effect. We consider a labor market in which workers can either establish a long-term relationship with an employer by being productive, or shirk and move from one employer to the next. In addition, the workers can signal to a potential employer their intention to be productive. We show that lower search costs lead to fewer employees willing to exert effort and, in a separating equilibrium, to more individuals opting to stay completely out of the job market and remain unemployed. Furthermore, we show that lower search costs not only deteriorate the market composition, but also impair efficiency by leading to more expensive signaling in a separating equilibrium. |
| Keywords: | Signaling; job market; job search; separating equilibrium; unemployment; moral hazard |
| JEL: | D82 C72 C73 J64 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:kse:dpaper:10&r=dge |
| By: | Yuliya Rychalovska |
| Abstract: | The paper analyzes the stabilization objectives of optimal monetary policy and the trade-offs facing the central bank in a two-sector small open economy model obtained as a limiting case of a two-country DSGE framework. We introduce a more complicated economic structure, namely, multiple domestic sectors combined with a variety of exogenous shocks. In addition, our model includes a more general specication of consumers’ preferences than has been considered in the literature so far. As a result, we are able to uncover additional welfare effects specic to the open multi-sectoral economy and make a methodological contribution by deriving a utility-based welfare measure and the optimal reaction function of the central bank. We show that the optimal targeting rule is represented by a complex expression that prescribes the response to the appropriate measure of domestic inflation, sectoral output gaps, as well as to the relevant relative prices. We demonstrate that our model generates an endogenous conflict between the objectives of domestic inflation and real exchange rate stabilization in addition to the inflation-output gap policy trade-off common in the literature. Furthermore, we experiment with alternative simple rules and analyze their ability to replicate the optimal solution. |
| Keywords: | DSGE models, non-traded goods, optimal monetary policy, welfare. |
| JEL: | E52 E58 E61 F41 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2007/16&r=dge |
| By: | Levon Barseghyan; Riccardo DiCecio |
| Abstract: | We endogenize total factor productivity in a neoclassical model with increasing returns to scale. We obtain multiple steady-state equilibria with an arbitrarily small degree of increasing returns to scale. While the most productive firms operate across all the steady states, in a poverty trap less productive firms operate as well. This results in lower average firm productivity and total factor productivity. A calibrated version of our model displays sizable differences in TFP and output across steady state equilibria. |
| Keywords: | Industrial productivity |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-023&r=dge |
| By: | Andriy Zapechelnyuk; Ro'i Zultan |
| Abstract: | The high cost of searching for employers borne by prospective employees increases friction in the labor market and inhibits formation of efficient employer-employee relationships. It is conventionally agreed that mechanisms that reduce the search costs (e.g., internet portals for job search) lower unemployment and improve overall welfare. We demonstrate that a reduction of the search costs may have the converse effect. We consider a labor market in which workers can either establish a long-term relationship with an employer by being productive, or shirk and move from one employer to the next. In addition, the workers can signal to a potential employer their intention to be productive. We show that lower search costs lead to fewer employees willing to exert effort and, in a separating equilibrium, to more individuals opting to stay completely out of the job market and remain unemployed. Furthermore, we show that lower search costs not only deteriorate the market composition, but also impair efficiency by leading to more expensive signaling in a separating equilibrium. |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp488&r=dge |
| By: | Willem H. Buiter |
| Abstract: | A fall in house prices due to a change in fundamental value redistributes wealth from those long housing (for whom the fundamental value of the house they own exceeds the present discounted value of their planned future consumption of housing services) to those short housing. In a representative agent model and in the Yaari-Blanchard OLG model used in the paper, there is no pure wealth effect on consumption from a change in house prices if this represents a change in fundamental value. There is a pure wealth effect on consumption from a change in house prices if this reflects a change in the speculative bubble component of house prices. Two other channels through which house prices can affect aggregate consumption are (1) redistribution effects if the marginal propensity to spend out of wealth differs between those long housing and those short housing and (2) collateral or credit effects due to the collateralisability of housing wealth and the non-collateralisability of human wealth. A decline in house prices reduces the scope for mortgage equity withdrawal. For given sequences of future after-tax labour income and interest rates, this may depress consumption in the short run while boosting it in the long run. |
| JEL: | E2 E21 E22 E3 E32 E37 G1 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14204&r=dge |
| By: | David R.F. Love (Department of Economics, Brock University); Jean-Francois Lamarche (Department of Economics, Brock University) |
| Abstract: | Standard real business cycle (RBC) theory assumes that changes in economic conditions are unanticipated. We argue that upcoming changes are often well anticipated. Employing the RBC methodology to evaluate models when changes in economic conditions are fully anticipated provides evidence on the relevance of this alternative. We find that anticipation effects i) reduce the exogenous volatility required for the models to explain output folatility, ii) improves or leaves unchanged, the model predictions for the data moments studied and, iii) can go some way to providing realistic internal propagation mechanisms within theoretical frameworks. |
| Keywords: | Anticipation, Real Business Cycles, Impulse Responses |
| JEL: | E10 E30 E37 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:brk:wpaper:0703&r=dge |
| By: | Kenichi Ueda |
| Abstract: | There is world-wide convergence in life expectancy, despite little convergence in GDP per capita. If one values longer life much more than material happiness, the world living standards may this have already converged substantially. This paper introduces the concept of the dynastic general equilibrium value of life to measure welfare gains from the increase in life expectancy. A calibration study finds sizable welfare gains, but these gains hardly mitigate the large inequality among countries. A conventional GDP-based measure remains a good approximation for (non) convergence in world living standards, even when adjusted for changes in life expectancy. |
| Keywords: | Working Paper , Income distribution , Population , Aging , Welfare , Cost of living , |
| Date: | 2008–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/158&r=dge |