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on Dynamic General Equilibrium |
| By: | Guido Menzio (Department of Economics, University of Pennsylvania); Shouyong Shi (Department of Economics, University of Toronto) |
| Abstract: | We build a directed search model of the labor market in which workers’ transitions between unemployment, employment, and across employers are endogenous. We prove the existence, uniqueness and efficiency of a recursive equilibrium with the property that the distribution of workers across employment states does not affect the agents’ values and strategies. Because of this property, we are able to compute the equilibrium outside the non-stochastic steady-state. We use a calibrated version of the model to measure the effect of productivity shocks on the US labor market. We find that productivity shocks generate procyclical fluctuations in the rate at which unemployed workers become employed and countercyclical fluctuations in the rate at which employed workers become unemployed. Moreover, we find that productivity shocks generate large countercyclical fluctuations in the number of vacancies opened for unemployed workers and even larger procyclical fluctuations in the number of vacancies created for employed workers. Overall, productivity shocks alone can account for 80 percent of unemployment volatility, 30 percent of vacancy volatility and for the nearly perfect negative correlation between unemployment and vacancies. |
| Keywords: | Directed Search, On the Job Search, Business Cycles |
| JEL: | E24 E32 J64 |
| Date: | 2008–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:08-029&r=dge |
| By: | Guido Menzio; Shouyong Shi |
| Abstract: | We build a directed search model of the labor market in which workers' transitions between unemployment, employment, and across employers are endogenous. We prove the existence, uniqueness and efficiency of a recursive equilibrium with the property that the distribution of workers across employment states does not affect the agents' values and strategies. Because of this property, we are able to compute the equilibrium outside the non-stochastic steady-state. We use a calibrated version of the model to measure the effect of productivity shocks on the US labor market. We find that productivity shocks generate procyclical fluctuations in the rate at which unemployed workers become employed and countercyclical fluctuations in the rate at which employed workers become unemployed. Moreover, we find that productivity shocks generate large countercyclical fluctuations in the number of vacancies opened for unemployed workers and even larger procyclical fluctuations in the number of vacancies created for employed workers. Overall, productivity shocks alone can account for 80 percent of unemployment volatility, 30 percent of vacancy volatility and for the nearly perfect negative correlation between unemployment and vacancies. |
| Keywords: | Directed search; On the Job Search; Business Cycles |
| JEL: | E24 E32 J64 |
| Date: | 2008–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-327&r=dge |
| By: | Chen, Yan; Zhang, Yan |
| Abstract: | We investigate the quantitative implications of government tariff policy in a discrete-time one-sector small open economy RBC model with a productive externality that generates social increasing returns to scale. Starting from a laissez-faire economy that exhibits local indeterminacy, we show that the introduction of a constant tariff or subsidy (imposed on the imported factor (say. energy)) can lead to various forms of endogenous fluctuations, including stable 2-, 4-, 8-, and 15-cycles, quasiperiodic orbits and chaos. We show that it can be misleading to use local steady-state analysis to detect the presence of multiple equilibria in this class of models. For a plausible range of tariff rates, the local analysis shows that the log-linearized dynamical system is saddle-point stable, suggesting a unique equilibrium. However, the true nonlinear model exhibits global indeterminacy. Overall, our results highlight the importance to use a model's nonlinear equilibrium conditions to fully examine global dynamics. |
| Keywords: | Tariff Policy; Business Cycles; Global Indeterminacy;Sunspots; Nonlinear Dynamics; Chaos. |
| JEL: | E32 Q43 |
| Date: | 2008–08–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10019&r=dge |
| By: | Francisco M. Gonzalez; Shouyong Shi |
| Abstract: | We construct an equilibrium theory of learning from search in the labor market, which addresses the search behavior of workers, the creation of jobs, and the wage distribution as functions of unemployment duration. In the model, each worker has incomplete information about his job-finding ability and learns about it from his search outcomes. The theory formalizes a notion akin to that of discouragement: over the unemployment spell, unemployed workers update their beliefs about their job-finding abilities downward and reduce their desired wages. One contribution of the paper is to integrate learning from search into an equilibrium framework. We show that the equilibrium exhibits wage dispersion among homogeneous workers, and that workers with longer unemployment spells have lower permanent incomes. Another contribution is to apply lattice-theoretic techniques to analyze learning from experience, which is useful because learning generates convex value functions and, in principle, multiple solutions to a worker's optimization problem. |
| Keywords: | Learning; Wages; Unemployment; Directed search; Supermodularity. |
| JEL: | E24 D83 J64 |
| Date: | 2008–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-328&r=dge |
| By: | Stephanie Schmitt-Grohe; Martin Uribe |
| Abstract: | In this paper, we perform a structural Bayesian estimation of the contribution of anticipated shocks to business cycles in the postwar United States. Our theoretical framework is a real-business-cycle model augmented with four real rigidities: investment adjustment costs, variable capacity utilization, habit formation in consumption, and habit formation in leisure. Business cycles are assumed to be driven by permanent and stationary neutral productivity shocks, permanent investment-specific shocks, and government spending shocks. Each of these shocks is buffeted by four types of structural innovations: unanticipated innovations and innovations anticipated one, two, and three quarters in advance. We find that anticipated shocks account for more than two thirds of predicted aggregate fluctuations. This result is robust to estimating a variant of the model featuring a parametric wealth elasticity of labor supply. |
| JEL: | C11 C51 E13 E32 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14215&r=dge |
| By: | Shouyong Shi |
| Abstract: | This paper addresses why it is beneficial for a society to restrict the use of nominal bonds as a means of payment for goods. The model has a centralized asset market and a decentralized goods market. Individuals face matching shocks that affect the marginal utility of consumption, but they cannot insure, borrow or trade assets against such risks. The government imposes a legal restriction to prohibit nominal bonds from being used as a means of payment in a subset of trades. I show that this partial legal restriction can improve the society's welfare. In contrast to the literature, the efficiency role of the restriction exists in the steady state and it does not require the households to be able to trade assets after receiving the shocks. Moreover, even when lump-sum taxes are available, the efficiency role continues to exist under a condition that induces optimal money growth to be above the Friedman rule. |
| Keywords: | Nominal Bonds; Money; Efficiency; Return dominance |
| JEL: | E40 |
| Date: | 2008–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-329&r=dge |
| By: | Zhang, Yan |
| Abstract: | We establish conditions under which indeterminacy can occur in a small open economy oil-in the production RBC model with lump sum tariff revenue transfers. The indeterminacy would require that the steady state tariff rates be in an open interval. This means that as long as the government revenues are exogenous, our indeterminacy result will be robust to the usage of the government revenue. |
| Keywords: | Indeterminacy; Endogenous Tariff Rate; Small Open Economy; Lump Sum Transfers. |
| JEL: | F41 Q43 |
| Date: | 2008–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10043&r=dge |
| By: | Lars Peter Hansen |
| Abstract: | I explore the equilibrium value implications of economic models that incorporate reactions to a stochastic environment. I propose a dynamic value decomposition (DVD) designed to distinguish components of an underlying economic model that influence values over long horizons from components that impact only the short run. To quantify the role of parameter sensitivity and to impute long-term risk prices, I develop an associated perturbation technique. Finally, I use DVD methods to study formally some example economies and to speculate about others. A DVD is enabled by constructing operators indexed by the elapsed time between the date of pricing and the date of the future payoff (i.e. the future realization of a consumption claim). Thus formulated, methods from applied mathematics permit me to characterize valuation behavior as the time between price determination and payoff realization becomes large. An outcome of this analysis is the construction of a multiplicative martingale component of a process that is used to represent valuation in a dynamic economy with stochastic growth. I contrast the differences in the applicability between this multiplicative martingale method and an additive martingale method familiar from time series analysis that is used to identify shocks with long-run economic consequences. |
| JEL: | C0 E44 G1 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14243&r=dge |
| By: | Zhang, Yan; Chen, Yan |
| Abstract: | We explore the equivalence between the factor income taxes (in Schmitt-Grohe and Uribe 1997) in the closed economy and the tariff in the open economy, in the sense that they share similar propagation mechanism of sunspot and fundamental shocks under a balanced-budget rule. |
| Keywords: | Sunspots; Endogenous Tariff Rate; Comovement |
| JEL: | F41 Q43 |
| Date: | 2008–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10044&r=dge |
| By: | Michal Bauer (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Julie Chytilová (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | Endogenous time discounting is introduced in a two-period human-capital-driven growth model: subjective discount rate depends upon the level of human capital. This assumption accords strongly with the micro-level evidence. In the model an individual optimizes consumption over two periods. Low human capital societies do not grow fast since high discount rate discourages schooling as the major form of savings. This implication is further reinforced by modeling the efficiency of schooling in the context of population pressure which is also driven by low human capital. The model may produce multiple development regimes and it illustrates wider role of education in tackling possible development traps. |
| Keywords: | banking; growth, human capital, education, time discounting, discount rate, poverty |
| JEL: | D9 I2 O1 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2008_14&r=dge |
| By: | Azzato, Jeffrey D.; Krawczyk, Jacek B. |
| Abstract: | This article is a modified version of [AK06]. Both articles explain how a suite of MATLAB routines distributed under the generic name SOCSol can be used to obtain optimal solutions to continuous-time stochastic optimal control problems. The difference between the SOCSol suites described by the articles arises from the underlying computing platforms used. This article describes a beta version of SOCSol that utilises the MATLAB Parallel Computing Toolbox, while [AK06] describes a version of SOCSol that does not use parallel computing methods. |
| Keywords: | Computational techniques; Economic software; Computational methods in stochastic optimal control; Computational economics; Approximating Markov decision chains |
| JEL: | C63 C87 |
| Date: | 2008–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9993&r=dge |
| By: | Daron Acemoglu; Georgy Egorov; Konstantin Sonin |
| Abstract: | A central feature of dynamic collective decision-making is that the rules that govern the procedures for future decision-making and the distribution of political power across players are determined by current decisions. For example, current constitutional change must take into account how the new constitution may pave the way for further changes in laws and regulations. We develop a general framework for the analysis of this class of dynamic problems. Under relatively natural acyclicity assumptions, we provide a complete characterization of dynamically stable states as functions of the initial state and determine conditions for their uniqueness. We show how this framework can be applied in political economy, coalition formation, and the analysis of the dynamics of clubs. The explicit characterization we provide highlights two intuitive features of dynamic collective decision-making: (1) a social arrangement is made stable by the instability of alternative arrangements that are preferred by sufficiently many members of the society; (2) efficiency-enhancing changes are often resisted because of further social changes that they will engender. |
| JEL: | C71 D71 D74 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14239&r=dge |
| By: | Azzato, Jeffrey D.; Krawczyk, Jacek B. |
| Abstract: | Parallel MATLAB is a recent MathWorks product enabling the use of parallel computing methods on multicore personal computers. SOCSol is the generic name of a suite of MATLAB routines that can be used to obtain optimal solutions to continuous-time stochastic optimal control problems. In this report, we compare the performance of a new version of SOCSol utilising parallel MATLAB with that of another version not using parallel computing methods. |
| Keywords: | Computational techniques; Economic software; Computational methods in stochastic optimal control; Computational economics; Approximating Markov decision chains |
| JEL: | C63 C87 |
| Date: | 2008–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9994&r=dge |